EX-99.1 3 d578168dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

 

LOGO

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

FRUTAROM INDUSTRIES LTD.

We have audited the accompanying consolidated financial statements of Frutarom Industries Ltd. (hereafter—the Company) which comprise the consolidated statements of financial position as of December 31, 2017 and 2016, and the related consolidated statements of income, of comprehensive income, changes in equity and cash flows for each of the three years in the period ended on December 31, 2017.

Management and Board of Directors’ Responsibility for the Consolidated Financial Statements

Management and Board of Directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management and Board of Directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Frutarom Industries Ltd. as of December 31, 2017 and 2016, and their results of operations and their cash flows for each of the three years in the period ended on December 31, 2017, in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

 

Haifa, Israel                /s/ Kesselman & Kesselman
June 14, 2018                    Certified Public Accountant (Isr.)
   A member firm of PricewaterhouseCoopers International Limited

 

Kesselman & Kesselman, Building 25, MATAM, P.O BOX 15084 Haifa, 3190500, Israel

Telephone: +972 -4- 8605000, Fax:+972 -4- 8605001, www.pwc.com/il


FRUTAROM INDUSTRIES LTD.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

            As of December 31  
     Note      2017      2016  
            U.S. dollars in thousands  

Assets

        

CURRENT ASSETS:

     

Cash and cash equivalents

     19        118,214        113,528  

Accounts receivable:

     16        

Trade

        248,043        200,106  

Other

        23,647        29,888  

Prepaid expenses and advances to suppliers

        21,265        20,248  

Inventory

     17        308,891        260,951  
     

 

 

    

 

 

 
        720,060        624,721  
     

 

 

    

 

 

 

NON-CURRENT ASSETS :

        

Property, plant and equipment

     7        312,876        268,820  

Intangible assets

     2f.8        829,226        657,781  

Investment in associates and available for sale assets

     15        77,541        27,976  

Deferred income tax assets

     13d        3,886        3,477  

Other

     18        3,599        2,686  
     

 

 

    

 

 

 
        1,227,128        960,740  
     

 

 

    

 

 

 

Total assets

        1,947,188        1,585,461  
     

 

 

    

 

 

 

 

 

 

  )
  Dr. John Farber   )
  Chairman of the Board  
 

 

  )
  Ori Yehudai   )
  President and CEO  
 

 

  )
  Alon Granot   )
  Executive Vice President and CFO  

Date of approval of the financial statements by the Board of Directors: June 14, 2018.

 

F-2


FRUTAROM INDUSTRIES LTD.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

            As of December 31  
     Note      2017     2016  
            U.S. dollars in thousands  

Liabilities and shareholders’ equity

       

CURRENT LIABILITIES:

       

Short-term bank credit and loans and current maturities of long-term loans

     9        372,135       234,204  

Accounts payable:

       

Trade

     20a        98,813       81,630  

Other

     20b        140,560       109,607  

Put option liability for the shareholders of a Subsidiary

     5a.1              40,350  
     

 

 

   

 

 

 
        611,508       465,791  
     

 

 

   

 

 

 

NON-CURRENT LIABILITIES:

       

Long-term loans net of current maturities

     9        262,151       299,576  

Retirement benefit obligations, net

     10        34,006       35,041  

Deferred income tax liabilities

     13d        58,306       50,147  

Liability for shareholders of a subsidiaries and other

     3        102,304       70,302  
     

 

 

   

 

 

 
        456,767       455,066  
     

 

 

   

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES

     11       
     

 

 

   

 

 

 

TOTAL LIABILITIES

        1,068,275       920,857  
     

 

 

   

 

 

 

EQUITY:

     12       

Equity attributable to owners of the parent:

       

Ordinary shares

        17,086       16,997  

Other capital surplus

        120,288       114,396  

Translation differences

     2c        (45,187     (109,043

Retained earnings

        783,029       637,868  

Less—cost of Company shares held by the company

        (3,409     (3,765
     

 

 

   

 

 

 

NON-CONTROLLING INTERESTS

        7,106       8,151  
     

 

 

   

 

 

 

TOTAL EQUITY

        878,913       664,604  
     

 

 

   

 

 

 

TOTAL EQUITY AND LIABILITIES

        1,947,188       1,585,461  
     

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-3


FRUTAROM INDUSTRIES LTD.

CONSOLIDATED INCOME STATEMENT

 

            Year ended December 31  
     Note      2017      2016      2015  
            U.S. dollars in thousands,
(except for per share information)
 

SALES

        1,362,396        1,147,041        872,796  

COST OF SALES

     21a        837,271        709,488        534,737  
     

 

 

    

 

 

    

 

 

 

GROSS PROFIT

        525,125        437,553        338,059  

Selling, marketing, research and development expenses—net

     21b        220,014        196,001        141,237  

General and administrative expenses

     21c        92,155        81,637        63,742  

Other expenses—net

     21d        3,392        11,772        2,826  

Group’s share of earnings of investees accounted for at equity

     15        1,402        1,113         
     

 

 

    

 

 

    

 

 

 

INCOME FROM OPERATIONS

        210,966        149,256        130,254  

FINANCIAL EXPENSES—net

     21e        24,606        12,841        12,197  
     

 

 

    

 

 

    

 

 

 

INCOME BEFORE TAXES ON INCOME

        186,360        136,415        118,057  

INCOME TAX

     13e        34,797        25,346        21,972  
     

 

 

    

 

 

    

 

 

 

NET INCOME FOR THE YEAR

        151,563        111,069        96,085  
     

 

 

    

 

 

    

 

 

 

PROFIT ATTRIBUTED TO:

        

Owners of the parent company

        149,679        109,245        94,859  

Non-controlling interest

        1,884        1,824        1,226  
     

 

 

    

 

 

    

 

 

 

TOTAL INCOME:

        151,563        111,069        96,085  
     

 

 

    

 

 

    

 

 

 
            U.S dollars  

EARNINGS PER SHARE:

     2w     

Basic

        2.52        1.85        1.62  
     

 

 

    

 

 

    

 

 

 

Fully diluted

        2.51        1.84        1.60  
     

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-4


FRUTAROM INDUSTRIES LTD.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

            Year ended December 31  
     Note      2017     2016      2015  
            U.S. dollars in thousands  

INCOME FOR THE YEAR

        151,563       111,069        96,085  

Other comprehensive income:

          

Items that will not be reclassified subsequently to profit or loss:

          

Remeasurement of net defined benefit Liability

        2,716       1,123        (858

ITEMS THAT COULD BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS

          

Gain from available-for-sale financial assets

              41         

Transfer of available-for-sale financial assets to profit and loss

     15b.2        (41             

Translation differences

        64,428       3,910        (65,293
     

 

 

   

 

 

    

 

 

 

Total comprehensive income for the Year

        218,666       116,143        29,934  
     

 

 

   

 

 

    

 

 

 

ATTRIBUTABLE TO:

          

Owners of the parent

        216,210       114,615        28,911  

Non-controlling interest

        2,456       1,528        1,023  
     

 

 

   

 

 

    

 

 

 

TOTAL INCOME

        218,666       116,143        29,934  
     

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-5


(Continued)—1

FRUTAROM INDUSTRIES LTD.

CONSODLIATED STATEMENT OF CHANGES IN EQUITY

 

            EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT        
    

Note
     Ordinary
shares
     Other
capital
surplus
    Translation
differences
    Retained
earnings
    Cost of company
shares held
by the company
    Total—attributed
to Owners of the
parent company
    Non-
controlling
interest
    Total  
            U.S. dollars in thousands  

BALANCE AT JANUARY 1, 2015

        16,822        106,664       (48,159     445,653       (2,587     518,393       3,626       522,019  

CHANGES DURING THE YEAR ENDED December 31, 2015:

                    

Comprehensive income:

                    

Income for the year

                           94,859             94,859       1,226       96,085  

Other comprehensive income

     2c                     (65,090     (858           (65,948     (203     (66,151
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

                     (65,090     94,001             28,911       1,023       29,934  

Plan for allotment of Company shares to employees of subsidiary:

                    

Acquisition of the Company shares by the Company

     2s                                 (1,085     (1,085           (1,085

Receipts in respect of allotment of Company shares to employees

     12b               (374                 561       187             187  

Allotment of shares and options to senior employees-Recognition of compensation related to employee stock and option grants

     12b               1,541                         1,541             1,541  

Proceeds from issuance of shares to senior employees

        90        2,635                         2,725             2,725  

Dividend paid to the non-controlling interests in subsidiary

                                             (58     (58

Dividend paid

     12c                           (5,774           (5,774           (5,774
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        90        3,802             (5,774     (524     (2,406     (58     (2,464
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interest from business combination

     5j                                             2,195       2,195  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT December 31, 2015

        16,912        110,466       (113,249     533,880       (3,111     544,898       6,786       551,684  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-6


(Continued)—2

FRUTAROM INDUSTRIES LTD.

CONSODLIATED STATEMENT OF CHANGES IN EQUITY

 

          EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT        
    Note     Ordinary
shares
    Other
capital
surplus
    Translation
differences
    Retained
earnings
    Cost of company
shares held by
the company
    Total attributed
to Owners
parent company
    Non-
controlling
interest
    Total  
          U.S. dollars in thousands  

BALANCE AT JANUARY 1, 2016

      16,912       110,466       (113,249     533,880       (3,111     544,898       6,786       551,684  

CHANGES DURING THE YEAR ENDED December 31, 2016:

                 

Comprehensive income:

                 

Income for the year

                        109,245             109,245       1,824       111,069  

Other comprehensive income

    2c             41       4,206       1,123             5,370       (296     5,074  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

            41       4,206       110,368             114,615       1,528       116,143  

Plan for allotment of Company shares to employees of subsidiary:

                 

Acquisition of the Company shares by the Company

    2s                               (1,395     (1,395           (1,395

Receipts in respect of allotment of Company shares to employees

    12b             (494                 741       247             247  

Allotment of shares and options to senior employees-Recognition of compensation related to employee stock and option grants

    12b             1,577                         1,577             1,577  

Proceeds from issuance of shares to senior employees

      85       2,729                         2,814             2,814  

Changes of ownership rights in subsidiary

            77                         77       (973     (896

Dividend paid to the non-controlling interests in subsidiary

                                          (63     (63

Dividend paid

    12c                         (6,380           (6,380           (6,380
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      85       3,889             (6,380     (654     (3,060     (1,036     (4,096
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interest from business combination

    5b                                           873       873  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT December 31, 2016

      16,997       114,396       (109,043     637,868       (3,765     656,453       8,151       664,604  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-7


(Concluded)—3

FRUTAROM INDUSTRIES LTD.

CONSODLIATED STATEMENT OF CHANGES IN EQUITY

 

          EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT        
    Note     Ordinary
shares
    Other
capital
surplus
    Translation
differences
    Retained
earnings
    Cost of company
shares held by
the company
    Total attributed
to Owners
parent company
    Non-
controlling
interest
    Total  
          U.S. dollars in thousands  

BALANCE AT JANUARY 1, 2017

      16,997       114,396       (109,043     637,868       (3,765     656,453       8,151       664,604  

CHANGES DURING THE YEAR ENDED December 31, 2017:

                 

Comprehensive income:

                 

Income for the year

                        149,679             149,679       1,884       151,563  

Other comprehensive income

    2c             (41     63,856       2,716             66,531       572       67,103  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

            (41     63,856       152,395             216,210       2,456       218,666  

Plan for allotment of Company shares to employees of subsidiary:

                 

Acquisition of the Company shares by the Company

    2s                               (1,528     (1,528           (1,528

Receipts in respect of allotment of Company shares to employees

    12b             (1,256                 1,884       628             628  

Allotment of shares and options to senior employees-Recognition of compensation related to employee stock and option grants

    12b             1,838                         1,838             1,838  

Proceeds from issuance of shares to senior employees

      89       4,296                         4,385             4,385  

Changes of ownership rights in a subsidiary

            1,055                         1,055       (3,450     (2,395

Dividend paid to the non-controlling interests in subsidiary

                                          (51     (51

Dividend paid

    12c                         (7,234           (7,234           (7,234
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      89       5,933             (7,234     356       (856     (3,501     (4,357
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT December 31, 2017

      17,086       120,288       (45,187     783,029       (3,409     871,807       7,106       878,913  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-8


FRUTAROM INDUSTRIES LTD.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

            Year ended December 31  
     Note      2017     2016     2015  
            U.S. dollars in thousands  

CASH FLOWS FROM OPERATING ACTIVITIES:

         

Cash generated from operations (see Appendix)

        223,210       139,235       112,625  

Income tax paid—net

        (35,681     (14,610     (20,963
     

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

        187,529       124,625       91,662  
     

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

         

Purchase of property, plant and equipment

        (34,394     (28,493     (23,900

Purchase of intangibles

        (2,890     (1,344     (717

Interest received

        1,294       656       428  

Acquisition of subsidiaries—net of cash acquired

     5        (109,265     (103,786     (143,777

Payments on account of acquisition of subsidiary

                    (131,838

Purchase of available for sale securities

        (40,169     (2,199      

Proceeds from sale of property and other assets

        454       11,099       2,191  
     

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

        (184,970     (124,067     (297,613
     

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

         

Dividend paid to the non-controlling interests in subsidiary

        (51     (1,434     (542

Receipts from senior employees in respect of allotment of shares

        4,385       2,814       2,725  

Interest paid

        (8,929     (7,324     (3,973

Receipt of long-term bank loans

        133,373       156,890       185,616  

Settlement of Put option to shareholders in a subsidiary

     5a        (42,227            

Acquisition of non-controlling interests in subsidiary

        (2,395     (896      

Repayment of long-term bank and financial institutions loans

        (172,909     (92,460     (48,638

Receipt (repayment) of short-term bank loans and credit-net

        88,455       (3,056     87,463  

Acquisition of the Company shares by the Company—net of receipts in respect of the Shares

        (900     (1,148     (898

Dividend paid

        (7,234     (6,380     (5,774
     

 

 

   

 

 

   

 

 

 

Net cash provided (used) by financing activities

        (8,432     47,006       215,979  
     

 

 

   

 

 

   

 

 

 

INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS

        (5,873     47,564       10,028  

Balance of cash and cash equivalents and bank credit at beginning of year and bank credit

        113,528       68,997       63,975  

Profits (losses) from exchange differences on cash and cash

         

Equivalents

        10,559       (3,033     (5,006
     

 

 

   

 

 

   

 

 

 

BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR

        118,214       113,528       68,997  
     

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-9


FRUTAROM INDUSTRIES LTD.

CONSOLIDATED STATEMENT OF CASH FLOWS

APPENDIX TO CONDENSED CONSOLIDATED STATEMENT CASH FLOWS

 

     Year ended December 31  
CASH GENERATED FROM OPERATIONS:    2017     2016     2015  
     U.S. dollars in thousands  

Income before tax

     186,360       136,415       118,057  
  

 

 

   

 

 

   

 

 

 

Adjustments required to reflect the cash flows from operating activities:

      

Depreciation and amortization

     46,797       43,115       31,385  

Recognition of compensation related to employee stock and option grants

     1,838       1,577       1,541  

Retirement benefit obligation—net

     (641     1,236       1,428  

Loss (gain) from sale and write-off of fixed assets and other assets

Dividend received from companies accounted for under the equity method

    

1,934

2,250

 

 

   

(4,003


 

   

(250


 

Group’s share of losses (earnings) of companies accounted for at equity, net

     (1,402     (1,113      

Erosion of long-term loans

     (1,247     2,387       (3,096

Interest paid—net

     7,635       6,668       3,545  

Erosion of Liability for put option for the shareholders of a subsidiary

                 13,118  
  

 

 

   

 

 

   

 

 

 
     57,164       49,867       47,671  
  

 

 

   

 

 

   

 

 

 

Changes in operating asset and liability items:

      

Decrease (increase) in accounts receivable:

      

Trade

     (16,804     (14,106     1,293  

Other

     9,263       (49     (13,447

Decrease (increase) in other long-term receivables

     (1,223     (2,390     (106

Increase (decrease) in accounts payable:

      

Trade

     2,036       (5,097     (7,226

Other

     3,385       (3,685     (5,484

Increase (decrease) in other long-term payables

     1,815       336       321  

Increase in inventories

     (18,786     (22,056     (28,454
  

 

 

   

 

 

   

 

 

 
     (20,314     (47,047     (53,103
  

 

 

   

 

 

   

 

 

 

Net cash flows from operating activities

     223,210       139,235       112,625  
  

 

 

   

 

 

   

 

 

 

 

F-10


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—GENERAL

Information on the activities of Frutarom Industries Ltd. and its subsidiaries (hereafter—the “Group”).

Frutarom Industries Ltd. (hereafter – the Company) is a global company, founded in 1933. The Company itself and through its subsidiaries (“Frutarom or the “Group”) develops, produces and markets flavors and fine ingredients used in the manufacture of food, beverages, flavors, fragrances, pharma/nutraceuticals, cosmetics and personal care products. On December 31, 2017, Frutarom operated 72 production sites, 90 research and development laboratories, and 109 sales offices in Europe, North America, Latin America, Israel, Asia, Africa and New Zealand, marketed and sold over 70,000 products to more than 30,000 customers in more than 150 countries and employed 5,250 people throughout the world.

Frutarom has two main activities: the Flavors activity and the Fine Ingredients activity (the “core businesses”). In addition, the Company imports and markets raw materials that it does not itself manufactured, as part of the service offered to customers, which includes providing them comprehensive solutions for their needs. This activity is presented as part of trade and marketing operations. Segment information for the reporting years is presented in note 6.

The Company is a limited liability company incorporated and domiciled in Israel. The address of its registered office is 2 Hamenofim St., Herzeliya. The Company’s controlling shareholder is ICC Industries Inc.

The Company’s shares have been listed on the Tel-Aviv Stock Exchange (the “TASE”) since 1996. Since February 2005, Company shares are also listed through Global Depository Receipts on the official list of the London Stock Exchange (the “LSE”).

In recent years, with Frutarom’s internal growth and acquisitions, seasonal effects on its results have diminished. Nonetheless, increased demand for beverages, yogurts, ice cream and other food products during the summer months brings about higher sales and improvement to a certain extent in Frutarom’s profitability margins in the second and third quarters of the year.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

  a. Basis of Preparation:

 

  1) The Group’s financial statements as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017, are in compliance with International Financial Reporting Standards (hereafter—IFRS) as issued by the International Accounting Standards Board (“IASB”) and interpretations to IFRS issued by the International Financial Reporting Interpretations Committee (IFRIC).

The significant accounting policies described below have been applied consistently in relation to all the years presented, unless otherwise stated.

The financial statements have been prepared under the historical cost convention, subject to adjustments in respect of revaluation of amounts funded for severance pay, financial assets at fair value through profit or loss or available for sale presented at fair value.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. Actual results could differ significantly from those estimates and assumptions.

 

F-11


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

  2) The period of the Group’s operating cycle is 12 months.

 

  3) The Group analyses the expenses recognized in the income statements using the classification method based on the functional category to which the expense belongs.

 

  b. Principles of Consolidation

 

  1) Business combinations and subsidiaries

Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases.

The group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary (hereafter—the acquired company) is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group.

The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination (except for certain exceptional items specified in IFRS 3—“Business Combinations”) (as amended), hereafter—IFRS 3R) are measured initially at their fair values at the acquisition date. The Group recognizes non-controlling interest in an acquired company which are present ownership instruments and entitle their holders to a pro rata share of the entity’s net assets in the event of liquidation in accordance with the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s identifiable net assets. All other components of non-controlling interest are measured at fair value unless another measurement basis is required by IFRSs

Any contingent consideration accrued to the Group as part of a business combination is measured at fair value at the date of business acquisition. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in accordance with IAS 39 “Financial Instruments” either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity.

The excess of the overall amount of the transferred consideration, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired and the liabilities assumed is recorded as goodwill—(see also f(1) below).

In cases were the net amount at acquisition date of the identifiable assets acquired and of the liabilities assumed exceeds the overall consideration that was transferred, the amount of non-controlling interest in the acquiree and the fair value as of date of acquisition of any previous equity interest in the acquiree as above, the difference is recognized directly in income or loss at date of acquisition.

Inter-company transactions, balances, including income, expenses and dividends on transactions between group companies are eliminated. Profits and losses resulting from inter- company transactions that are recognized in assets (in respect of inventory and fixed assets) are also

 

F-12


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

  2) Associate companies

An associate is any entity in which the Group has significant influence, but not control. Investment in an associate is accounted for using the equity method of accounting.

According to the equity method, an investment is initially recorded at cost and the carrying amount is subsequently adjusted to reflect the investor’s share of the net assets of the associate or joint venture since acquisition date.

The Group determines on each reporting date whether indications exist of impairment of its investment in the associate. If such indications are present, the Group calculates the amount of impairment as a difference between the recoverable amount of investment (the higher of value in use and fair value less cost to sale) and its carrying amount, and recognizes an impairment loss in profit or loss near to the “share in income (loss) of associates accounted for using the equity method” item.

Income or loss arising from transactions between the Group and the companies are recognized in the financial statements of the Group only at the amount of the share in the associate or joint venture of investors that are unrelated to the Group. The share of the Group in the profit or loss of the associate or joint venture in relation to those transactions is eliminated. When the investment is no longer accounted as an associate or joint venture the Group would stop using the equity method and the investment would account as financial asset (IAS 39), as long as the associate or the joint venture has not became a subsidiary. The group would recognize profit or loss due to the difference between the fair-value of the remaining investment and returns for realization to the book value of the investment as of the time of losing the significant influence. All amounts recognized in other comprehensive income due to the investment would account as if the related assets or liabilities were realized (amounts that were recognized before as part of other comprehensive income might reclassified to profit or loss).

 

  c. Translation of Foreign Currency Balances and Transactions:

 

  1) Functional and Presentation Currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which that entity operates (the “Functional Currency”). The consolidated financial statements are presented in U.S. dollars, which is the Company’s functional and presentation currency.

 

  2) Transactions and balances.

Foreign currency transactions in currencies different from the functional currency (hereafterj—foreign currency) are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are attributed to income or loss.

Gains and losses arising from changes in exchange rates are presented in the income statement among “financial expenses”.

 

F-13


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

  3) Translation of Financial Statement of Group Companies

The results and financial position of all the Company’s entities (none of which has the currency of hyperinflationary economy) that have a Functional Currency different from the presentation currency are translated into the presentation currency as follows:

 

  (a) Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;

 

  (b) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates: in which case income and expenses are translated at the rate on the dates of the transactions);

 

  (c) All resulting exchange differences are recognized among other comprehensive income.

On consolidation of the financial statements, exchange differences arising from the translation of the net investment in foreign operations and from loans and other currency instruments designated to serve as hedges to those investments are carried to other comprehensive income.

Goodwill and fair value adjustments arising on the acquisition of foreign operations are treated as assets and liabilities of the foreign operations and translated at the closing rate. Exchange differences arising from translation as above are recognized in other comprehensive income.

 

  4) Information regarding exchange rates:

 

     NIS     Pound Sterling     Euro     Swiss Franc     Ruble  

Exchange rate as of December 31:

          

2017

     3.47       0.74       0.83       0.98       57.6  

2016

     3.85       0.81       0.95       1.02       61.27  

2015

     3.90       0.67       0.92       0.99       73.31  

Increase (decrease) of the dollar during the year:

     %       %       %       %       %  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2017

     (9.8     (9.0     (12.2     (4.4     (5.9

2016

     (1.5     20.6       3.5       2.7       (16.4

2015

     0.3       5.2       11.6       0.4       22.9  
     NIS     Pound Sterling     Euro     Swiss Franc     Ruble  

Average exchange rate during the year:

          

2017

     3.60       0.78       0.90       0.98       58.3  

2016

     3.84       0.74       0.90       0.99       66.23  

2015

     3.89       0.65       0.90       0.96       60.99  

Increase (decrease) during of the dollar during the year:

     %       %       %       %       %  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2017

     (6.3     5.2       (0.7     (0.1     (12.0

2016

     (1.2     12.7       0.3       2.5       8.6  

2015

     8.6       7.8       19.7       5.2       56.6  

 

F-14


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

  d. Segment Reporting (see also note 1)

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker in the Group, who is responsible for allocating resources and assessing performance of the operating segments.

The Group is organized and managed on a worldwide basis in two major operating activities: Flavors and the Fine Ingredients. Another operation is Trade and Marketing.

 

  e. Property, Plant and Equipment:

The cost of a property, plant and equipment item is recognized as an assets only if: (a) it is probable that the future economic benefits associated with the item will flow to the Group and (b) the cost of the item can be measured reliably.

Property, plant and equipment is stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items and only when the two criteria mentioned above for recognition as assets are met.

The carrying amount of a replaced part is derecognized. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

The cost of a property, plant and equipment item includes:

 

  (a) Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

 

  (b) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably.

Depreciation and impairment of property, plant and equipment are recognized in the income statement.

Land owned by the Group is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost less their residual values over their estimated useful lives, as follows:

 

     Percentage of
Annual
Depreciation

Buildings and land under financial lease

   2-4

Machinery and equipment

   5-10

Vehicles and lifting equipment

   15-20

Computers

   20-33

Office furniture and equipment

   6-20

Leasehold improvements

   See below

Leasehold improvements are amortized by the shorter of straight-line method over the terms of the lease or estimated useful life of the improvements.

The asset’s residual values, the depreciation method and useful lives are reviewed, and adjusted if appropriate, at least once a year.

 

F-15


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2g).

Gains or losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement among “other income—net”.

 

  f. Intangible Assets:

 

  1) The overall amount of goodwill arising on acquisition of a subsidiary, associated company or activity represents the excess of the consideration transferred in respect of acquisition of a subsidiary over the net amount as of acquisition date of the identifiable assets acquired and the liabilities assumed. Goodwill on acquisitions of subsidiaries is included in ‘intangible assets’.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash generating units (CGUs), or groups of CGUs that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes and which is not larger than an operating segment (before aggregation) (see also g. below).

Impairment reviews of CGUs (or groups of CGUs) are undertaken annually and whenever there is any indication of impairment of CGU or group of CGUs. The carrying value of the CGU (or group of CGUs) is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell.

Any impairment loss is allocated to write-down the carrying amount of the CGU’s assets (or CGUs) in the following order: first, the write down of any goodwill allocated to a cash generating unit (or a group of CGUs); and afterwards to the remaining assets of the CGU or (group of CGUs) on a proportionate basis using the carrying amounts of each asset of the CGU (or group of CGUs). Any impairment is recognized immediately as an expense and impairment of goodwill is not subsequently reversed.

 

  2) Product formulas acquired as part of a business combination transaction are initially recorded at fair value and amortized on a straight-line basis over their useful lives of 20 years.

 

  3) Customer relationships acquired in a business combination are measured at fair value at the acquisition date. The customer relations have a finite useful life and are carried at the recognized amount less accumulated amortization. Amortization is calculated using the straight-line method over the expected life of the customer relationship (10 years).

 

  4) Separately acquired trademarks and licenses are shown at historical cost. Trademarks and licenses acquired in a business combination are recognized at fair value at the acquisition date. Trademarks and licenses have a definite useful life and are presented at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of trademarks over their estimated useful lives (20 years).

 

  5) Computer software

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software licenses. These costs are amortized over their estimated useful lives (3-5 years) using the straight-line method.

Costs associated with maintaining computer software programs are recognized as an expense as incurred.

 

F-16


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

Computer software development costs recognized as assets are amortized over their estimated useful lives using the straight line method (3-5 years) commencing the point in time when the asset is available for use, i.e., it is in the location and condition necessary for it to be capable of operating in the manner intended by management.

 

  6) Research and Development

Research expenses are accounted for as expenses as incurred. Cost incurred in respect of development projects (attributable to the design and testing of new or improved products) are recognized as intangible assets when the following criteria are met:

 

    It is technically feasible to complete the intangible assets so that it will be available for use;

 

    Management intends to complete the intangible asset and use it or sell it;

 

    There is an ability to use or sell the intangible asset;

 

    It can be demonstrated how the software product will generate probable future economic benefits;

 

    Adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and

 

    The expenditure attributable to the intangible asset during its development can be reliably measured.

Other development costs that do not qualify for recognition as assets are recognized as cost as incurred. Development costs previously recognized as an expense are not recognized as an asset on a subsequent period.

The Group fully recognized the R&D expenses as incurred.

 

  g. Impairment of non-financial assets

Assets that have an indefinite useful life, such as goodwill, are not subject to amortization and are tested annually for impairment or more often if events have occurred or changes in circumstances indicate that the carrying amount may not be recoverable.

Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets, other than goodwill, that were subject to impairment are reviewed for possible reversal of the impairment recognized in respect thereof at each statement of financial position date.

 

  h. Government Grants

The group’s research and development activities are supported in some of the countries in which it operates, and in Israel through the Israel innovation authority by way of grants. Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are recognized in the income statement on a systematic basis over the periods in which the Group recognizes the relating costs (the costs that the grants are intended to compensate).

 

F-17


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

  i. Financial assets:

 

  1) Classification

The Group classifies its financial assets in the following categories: Financial assets at fair value through profit or loss, available for sale assets, loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Group management determines the classification of its financial assets at initial recognition.

 

  a) Financial assets at fair value through profit or loss

This category includes two sub-categories: financial assets held for trade and financial assets designated at fair value through profit or loss. A financial asset is classified into this category if it was acquired principally for the purpose of selling in the short term or if was designated to this category by management. Assets in this category are classified as current assets if expected to be settled within 12 months, otherwise they are classified as non-current.

 

  b) Receivables

Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date. These are classified as non-current assets. Receivables of the Group are classified as “accounts receivable”, “Cash and cash equivalents” and “long-term loans and other receivables” in the statement of financial position (Note 2k below).

 

  c) Available-for-sale assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the date of the statement of financial position, in which case they are classified as current assets.

 

  2) Recognition and measurement

Regular purchases and sales of financial assets are recognized on the settlement date, which is the date on which the asset is delivered to the Group or delivered by the Group. Investments are initially recognized at fair value plus transaction costs for all financial assets not measured at fair value through profit or loss. Financial assets measured at fair value through profit or loss, are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows there from have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Financial assets at fair value through profit or loss and available for sale assets are subsequently carried at fair value. Loans and receivables are measured in subsequent periods at amortized cost using the effective interest method.

Gains or losses that stem from changes in the fair value of financial assets at fair value through profit or loss are presented in income statement under “financial expenses—net” in the period in which they incurred. Dividend income from financial assets at fair value through profit or loss are recognized in income statement under “other income—net” when the group is eligible to these payments.

 

F-18


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

Gains or losses that stem from changes in the fair value of financial assets at available for sale assets are presented in statement of comprehensive income in the period in which they incurred. When selling available for sale assets, the accumulated gain or losses are reclassified from the comprehensive income to the profit or loss in “other expenses—net”.

 

  3) Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

 

  4) Impairment of financial assets

 

  a) Financial assets at fair value through profit or loss

Financial assets are presented at amortized cost.

The Group assesses at the each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Group uses to determine that there is objective evidence of an impairment of a financial assets or group of financial assets include observable information that came to the attention of the Group in connection with the following loss events:

 

    Significant financial difficulty of the issuer or obligor;

 

    breach of contract, such as a default or delinquency in interest or principal payments;

 

    The Group, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

 

    The disappearance of an active market for that financial asset because of financial difficulties;

 

    Observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio.

Where objective evidence for impairment exists, the amount of the loss is measured as the difference between the asset’s carrying amount of the financial assets and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed for the asset upon initial recognition). The asset’s carrying amount is reduced and the amount of the loss is recognized in the income statement.

If the amount of impairment loss in a subsequent period decreases, and this decrease may be attributed to an objective event that took place after the impairment was recognized (like improved credit rating of the borrower), reversing the previously recognized impairment loss is recorded in income statements.

 

F-19


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

  b) Available-for-sale financial assets

The group assesses at each date of the statement of financial position whether there is objective evidence that a financial asset or a group of financial assets is impaired. For testing whether there is objective evidence for impairment of a debt instrument, the Group uses the criteria in (a) above. For investments in equity securities, in addition to the criteria in (a) above, information regarding significant changes having adverse effect on the technological, economical or legal environment in which the issuer operates implicating that the cost of the equity investment might not be recovered as well as significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired.

If any such evidence exists, the cumulative loss (recognized in other comprehensive income)—measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss—is reclassified from equity and recognized in income or loss.

If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the income statement. Impairment losses that are recognized in profit or loss for investment in an equity instrument are not reversed through income or loss.

 

  j. Derivatives financial instruments, embedded derivatives and hedging activity

Hedge of net investment

Hedges of a net investment in a foreign operation are accounted for similarly to cash flow hedges. Any gain or loss on the effective portion of the hedge is recognized in other comprehensive income. Gain or loss on the ineffective portion is recognized in profit or loss. Gains or losses accumulated in equity are recycled to profit or loss when the foreign operation is disposed of or sold.

 

  k. Inventories

Inventories are measured at the lower of cost or net realizable value. Raw material cost is determined using the “moving average” method.

The cost of finished goods and work in progress comprises raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity) but excludes capitalization of borrowing costs.

Net realizable value is the estimated selling price in the ordinary course of business, less the applicable and variable selling expenses.

 

  l. Trade Receivables

Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less they are classified as current assets. If not, they are classified as non-current assets.

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment of accounts receivable (hereafter—“provision for impairment” or “provision for impairment of accounts receivable”). As to the way the impairment provision is determined and accounting treatment applied thereto subsequently see i4) above.

 

F-20


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

  m. Cash and Cash Equivalents

Cash and cash equivalents include cash in hand, short-term bank deposits and other highly liquid short-term investments, the maturity of which does not exceed three months, bank overdrafts (repayable upon demand).

 

  n. Share Capital

Ordinary shares of the Company are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in the equity as a deduction, net of tax, from the proceeds of issuance.

Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the company’s equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects are included in equity. Any difference between the cost of acquisition of the treasury shares and the consideration is carried to premium on shares.

 

  o. Trade Payables

Trade payables are obligations of the Group to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less.

If not, they are classified as non-current liabilities.

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

 

  p. Loans

Loans are recognized initially at their fair value, net of transaction costs incurred. Loans are subsequently measured at amortized cost; any difference between the consideration (net of transaction costs) and the redemption value is recognized in the income statement over the period of the loan using the effective interest method.

Loans are classified as current liabilities unless the Group has an unconditional right to defer settlement of the loans for at least 12 months after the end of the reporting period, in which case they are classified as non-current liabilities.

 

  q. Current and Deferred Income Taxes

The tax expenses for the reported years comprise of current and deferred tax. Tax is recognized in the income statement, except for taxes related to equity and other comprehensive income items.

The current income tax charge is calculated on basis of the tax laws enacted or substantially enacted at the statement of financial position date in the countries where the Company and the subsidiaries operate and generate taxable income. Management periodically evaluates tax issues related to its taxable income, based on relevant tax law, and makes provisions in accordance with the amounts payable to the Income Tax Authorities.

 

F-21


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

Deferred income tax is recognized using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Nevertheless, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affect neither accounting nor taxable income.

Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. The amount of deferred income taxes is determined using tax rates (and laws) that have been enacted or substantially enacted by the statement of financial position date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax is not calculated on temporary differences arising on investments in subsidiaries, as long as the timing of reversal of the differences is controlled by the Group and it is expected that no such reversal will take place in the foreseeable future.

The group recognizes deferred income tax assets in respect of temporary differences deductible for tax purposes only if it is expected that the temporary difference is revered in the foreseeable future and to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred income tax assets and liabilities are offset only if:

 

  - There is a legally enforceable right to offset current tax assets against current tax liabilities; and

 

  - When the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

As stated in Note 13c, upon distribution of dividends from tax-exempt income of “approved enterprises” or “benefited enterprises”, the amount distributed will be subject to tax at the rate that would have been applicable had the company not been exempted from payment thereof. The amount of the related tax is charged as an expense in the statement of comprehensive income, when such dividend is distributed.

 

  r. Employee Benefits:

 

  1) Pension Obligations and retirement benefits

The companies in the group operate a number of post-employment employee benefit plans, including defined benefit and defined contribution plans.

A defined contribution plan is a pension plan under which the group pays fixed contributions into a separate entity.

The group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

A defined benefit plan is a pension plan that is not a defined contribution plan.

The companies in the group operate a number of pension plans. The plans are funded through payments to insurance companies or pension funds that are managed in trust.

 

F-22


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

According to their terms, those pension plans satisfy the above definition of a defined contribution plan.

According to labor laws and agreements in Israel and the practices of the companies in the Group, Group companies are obligated to pay retirement benefits to employees dismissed or retiring in certain circumstances.

According to the obligation of group companies to employees who participate in a defined benefit plan, the amounts of benefits those employees are entitled to upon retirement are based on the number of years of services and the last monthly salary.

The obligation of the group companies to all other employees is a defined contribution plan, in which regular contributions are made to a separate and independent entity, and the companies of the Group have no legal or constructive liability to make any further payments if the assets of the funds are insufficient to pay all employees the benefits for work services in the current and past periods.

The total retirement benefit obligation presented in the statement of financial position is the present value of defined benefit contribution as of the date of financial position, less the fair value of plan assets. The defined contributions benefit is measured on an annual basis by an actuary using the projected unit credit method.

The present value of the liability is determined by discounting expected future cash flows (after taking into account the expected rate of payroll hikes) based on the interest rate of government/corporate bonds denominated in the currency in which the benefits will be paid and whose terms to maturity approximate the term of retirement benefit obligation.

According to IAS 19 “Employee Benefits”, the discount rate used for calculating the actuarial obligation is determined by using the market return of high-quality corporate bonds on the date of the statement of financial position. However, IAS 19 indicates that in countries where there is no deep market in such bonds, the market rates on government bonds are used.

The group recognizes remeasurements of net obligations (the asset) for defined benefit plan to other comprehensive income in the period in which they incurred. Those remeasurements are created as a result of changes in actuary assumptions, difference between past assumptions and actual results and differences between plan assets return and the amounts included in net interest on net liabilities (the asset) for defined benefit. Past-service costs are recognized immediately in income. Amount funded for severance benefits are measured at fair value. The amounts funded are plan assets as defined by IAS 19, and therefore were offset from the balance of retirement benefit obligation for presentation purposes in the statement of financial position.

As discussed above, the group purchase insurance policies and make contributions to pension and severance pay funds to fund its obligation under defined contribution plan. The group has no further payment obligations once the contributions have been paid. The contributions are defined as an expense for employee benefits concurrently to receiving services from employees that entitle them for contributions. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.

 

  2) Vacation and Recreation Fees

Under the law in various countries, employee is entitled for vacation days and recreation fees (in Israel), both computed on an annual basis. The entitlement is based on the period of employment.

 

F-23


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

The Group records a liability and an expense in respect of vacation and recreation fees, based on the benefit accumulated for each employee.

 

  3) Bonus plans

Some of the Group’s employees are entitled to receive an annual bonus in accordance with the bonuses plan determined by Group management for that year. The Group provides for payment of the bonus in accordance with meeting the targets of the plan and in accordance with Group’s estimate as to the total amount of bonuses to be paid to employees.

 

  s. Share-Based Compensation

The group operates a number of equity-settled, share-based compensation plans, under which the entity receives services from employees as consideration for equity instruments (options) of the Company. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense over the vesting period. The total amount to be expensed is determined by reference to the fair value of the options granted:

 

  including any market performance conditions (for example, an entity’s share price);

 

  Excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period);

 

  t. Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources will be required to settle the obligation and it is possible to prepare a reliable estimation of the amount of liability.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole.

Provisions are measured at the present value of the cash flow expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

 

  u. Revenue Recognition Policy

Revenue is measured at the fair value of the consideration received or receivable for the sale of goods in the ordinary course of business. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group.

Revenues from sale of goods are recognized by the Group when all of the following conditions are met:

 

  (a) The significant risks and rewards of ownership of the goods have been transferred by the Group to the buyer;

 

  (b) The group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.

 

  (c) The amount of revenues can be reliably measured.

 

  (d) It is probable that future economic benefit relating to the transaction will flow to the Group; and

 

  (e) The costs incurred or to be incurred in respect of the transaction can be measured reliably.

 

F-24


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

The amount of revenue is not considered to be reliably measurable until all contingencies relating to the transaction have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

The products are occasionally sold with volume discounts; customers have a right to return faulty products. Sales are recorded based on the selling price, net of the estimated volume discounts and returns at the time of sale. Accumulated experience is used to estimate and provide for the discounts and returns. The volume discounts are assessed based on anticipated annual purchases. No element of financing is present as the sales are made with an average credit term, which is not higher than the market practice.

 

  v. Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

Long-term lease contracts for lease of land from the Israel Land Administration and from other countries are presented among fixed assets.

 

  w. Earnings per Share

Basic:

The computation of basic earnings per share is based, as a general rule, on the profit attributable to holders of ordinary Company shares divided by the weighted average number of ordinary shares in issue during the period, excluding Company shares held by group subsidiaries (Notes 2m).

Fully Diluted:

When calculating the diluted earnings per share, the Group adds to the average number of shares outstanding that was used to calculate the basic earnings per share also the weighted average of the number of shares to be issued assuming the all shares that have a potentially dilutive effect would be converted into shares. The potential shares, as above are only taken into account in cases where their effect is dilutive (reducing the earnings per share or increasing the loss per share).

The weighted average number of shares used in calculating Basic and Diluted earnings per share is as follows:

 

     Basic      Diluted  
     In thousands      In thousands  

Year-end December 31:

     

2017

     59,342        59,632  

2016

     58,916        59,494  

2015

     58,573        59,141  

 

  x. Dividends

Dividend distribution to the Company’s owners is recognized as a liability in the Group’s statement of financial position on the date on which the dividends are approved by the Group’s Board of Directors. Dividend paid includes an erosion component (from date of approval of dividend through date of payment thereof).

 

F-25


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

  y. New standards, amendments and interpretations of existing standards, which have not yet become effective and not been early adopted by the Company:

 

  1. Amendment to IFRS 9—“Financial Instruments” (hereafter—“IFRS 9” or “the standard”):

IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI without recycling.

There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. The new impairment model establishes a three-stage approach, based on changes in expected credit risk of a financial instrument. Each stage determines how to measure credit losses and how to apply the effective interest method. In addition, for financial assets that have no material financing element, such as receivables, it is possible to implement a simpler method. At initial recognition of a financial asset, an entity recognizes a loss allowance equal to 12 months expected credit losses, or the loss expected over the life of the instruments for accounts receivables, unless the asset is considered to have an “ credit impaired rating”.

For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through other comprehensive income.

IFRS 9 simplifies the requirements for testing hedge effectiveness by dropping the strict quantitative thresholds for testing hedge effectiveness. IFRS 9 requires economic relationship between the underlying hedged risk component and the hedging instrument, and that the hedge ratio is the same used for risk management purposes. The standard retains the requirement for maintaining documentation throughout the hedge period, but documentation is different than that required by IAS 39.

IFRS 9 will be applied retrospectively for annual reporting periods beginning on or after January 1, 2018. Early adoption is permitted.

According to the Company assessment, the adoption of IFRS 9 is not expected to have material impact on the financial statements.

 

  2. IFRS 15 “Revenue from Contracts with Customers” (hereinafter—IFRS 15)

IFRS 15 will replace after its first-time adoption the guidance on revenue recognition in current IFRSs.

The core principle of IFRS 15 is that revenue from contracts with customers should be recognized using the method that best depicts the transfer of control of goods and services to the customer, the amount of consideration that the entity expects to be entitled to in exchange for transferring promised goods or services to a customer.

IFRS 15 has a single model for revenue recognition, based on a five-step approach:

 

  (1) Identify the contract(s) with the customer

 

F-26


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

  (2) Identify the separate performance obligations in the contract

 

  (3) Determine the transaction price

 

  (4) Allocate the transaction price to separate performance obligations

 

  (5) Recognize revenue when (or as) each performance obligation is satisfied

IFRS 15 covers accounting for a variety of issues related to implementation of that model, including: recognition of contractual variable consideration, adjustment of contractual transaction price to reflect the time value of money, and cost of obtaining and fulfilling the contract.

The standard expands the disclosure requirements about revenue, and, among other things, requires quantitative and qualitative information about significant management judgments that were considered for determining the amount of revenue recognized.

On July 22, 2015, the IASB decided to defer the effective date of the standard by one year, such that the standard will be applied retrospectively for annual periods beginning on or after January 1, 2018 with some exceptions as provided in the transition provisions of IFRS 15. According to the provisions of IFRS 15, early adoption is permitted.

Group management believes that the new standard is not expected to have material impact on the financial statements.

 

  3. IFRS 16 “Leases”

IFRS 16 will replace upon first-time implementation the existing guidance in IAS 17—“Leases” (hereafter—“IAS 17”). The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases, and is expected to have material impact mainly on the accounting treatment applied by the lessee in a lease transaction.

IFRS 16 changes the existing guidance in IAS 17 and requires lessees to recognize a lease liability that reflects future lease payments and a “right-of-use asset” in all lease contracts (except for the following), with no distinction between financing and capital leases. IFRS 16 exempts lessees in short-term leases or the when underlying asset has a low value.

IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.

IFRS 16 also changes the definition of a “lease” and the manner of assessing whether a contract contains a lease.

IFRS 16 will be effective retrospectively for annual periods beginning on or after January 1, 2019, taking into account the reliefs specified in the transition provisions of IFRS 16. Under the provisions of IFRS 16, early adoption is permitted only if IFRS 15 has also been applied. The group has decided to early adopt the standard, while applying the accumulated impact as of January 1, 2018 and additional reliefs, as the standard allows. The implementation is expected to impact the accounting of lease agreements: real-estate, equipment and vehicles. Starting January 1, 2018, the Company is going to recognize assets and liabilities due to leases, which until then were accounted as operating leases.

According to the Company assessment and the information available as of the date of this report:

 

  1) During the first-time implementation—Increase of approx. $37 million in assets and liabilities.

 

F-27


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

 

  2) Decrease of operational expenses during 2018 amounting approx. $9 million to $11 million and an increase of depreciation and financial expenses in a Appx amount. Additional impact is expected to the increase of cash flow from operating activities and a decrease in the cash flow from financing activities amounting $9 million to $11 million.

 

  3) The assessment is based on the information currently available and changes in lease agreements and additional examination could have impact on the final amounts.

NOTE 3—FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT:

 

  a. Financial Risk Management

 

  1) Financial Risk Factors

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.

Risk management is carried out under policies approved by the Board of Directors and senior management. These policies cover specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of non-derivative financial instruments, and investment of excess liquidity. Group policies also cover areas such as cash management and raising short and long-term debt.

The Group’s business is characterized by considerable dispersion. The Group produces tens of thousands of products intended for tens of thousands of customers throughout the world, using tens of thousands of raw materials purchased from a wide range of suppliers worldwide. As stated, the Group is not significantly dependent on any of its customers, products or suppliers.

Discussions on implementing the risk management policy as relates to currency exposure and interest are conducted by the Group’s management once each quarter.

 

  a) Market Risks:

 

  1) Foreign Exchange Risk

The Group operates globally and is exposed to movements in foreign currencies affecting its net income and financial position, as expressed in U.S. dollars.

Transaction exposure arises because the equivalent amount in local currency paid or received in transactions denominated in foreign currencies may vary due to changes in exchange rates. Most Group entities produce their income primarily in the local currency. A significant amount of expenditures, especially for the purchase of goods for resale are in foreign currencies. Similarly, transaction exposure arises on net balances of financial assets held in foreign currencies. Since raw materials purchases for the Group’s production are also conducted in various currencies, currency exposure is reduced.

The Group’s subsidiaries manage this exposure locally. In addition, Group management monitors total global exposure of the Group.

Translation exposure arises from the consolidation of the Foreign Currency denominated financial statements of the Company’s subsidiaries. The effect on the Group’s consolidated comprehensive income is shown as a currency translation difference.

 

F-28


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3—FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (continued):

 

The following table presents currency exposure in respect of balance denominated in currencies that are different than the functional currency of the reporting company and also the effect on income after taxes. At December 31, 2017 and 2016, if the currencies specified below had weakened/strengthened by 1% against the other functional currencies of group companies, with all other variables unchanged:

 

     December 31 2017  
     U.S. dollars in thousands  
            Pound             Swiss  
     NIS      Sterling      Euro      Franc  

Financial asset (liabilities), net

     (22,927      3,531        (81,296      3,468  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gain (loss) from change:

           

Impact of 1% weakening

     229        (35      813        (35

Impact 1% strengthening

     (229      35        (813      35  

 

     December 31 2016  
     U.S. dollars in thousands  
            Pound             Swiss  
     NIS      Sterling      Euro      Franc  

Financial asset (liabilities), net

     (3,444      711        (195,240      911  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gain (loss) from change:

           

Impact of 1% weakening

     34        (7      1,952        (9

Impact 1% strengthening

     (34      7        (1,952      9  

 

* Represents amounts lower than $1 thousand.

 

  2) Cash Flow Risk Relating to Interest Rates

Since on a current basis the Group does not have significant assets bearing interest, its revenues and operating cash flow are not dependent on changes in interest rates.

The Group’s interest rate risk arises from long-term and short-term borrowings. Borrowings received at variable rates expose the Group to cash flow interest rate risk.

The Group analyses its interest rate exposure. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions and alternative financing. Based on these scenarios, the Group calculates the impact on profit and loss of a defined interest rate shift. For each simulation, the same interest rate shift is used for all currencies. The scenarios are run only for liabilities that represent the major interest-bearing positions.

Based on the simulations performed, the impact on post tax profit for the year 2017 of a 0.1% shift in interest rate on loans would have been a change of $362 thousand (2016—$258 thousand; 2015—$233 thousand).

 

  b) Credit Risk

Credit risk arises from the possibility that the counter-party to a transaction may be unable or unwilling to meet their obligations causing a financial loss to the Group.

Trade receivables are subject to a policy of active risk management, which focuses on the assessment of country risk, credit limits, ongoing credit evaluation and accounting monitoring procedures.

 

F-29


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3—FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (continued):

 

There are no significant concentrations within trade receivables of counter-party credit risk due to the large number of customers that the Group deals with and their wide geographical spread. Country risk limits and exposures are continuously monitored. Collateral is generally not required.

The provision for impairment of trade receivables is determined on basis of a periodic test of all amounts due.

The exposure of other financial assets and liabilities to credit risk is controlled by setting a policy for limiting credit exposure to counter-parties, continuously reviewing credit ratings, and limiting individual aggregate credit exposure accordingly.

Group entities must have sufficient availability of cash to meet their obligations. Each company is responsible for its own cash management, including the short-term investment of cash surpluses and the raising of loans to cover cash deficits, subject to Group policies and to monitoring of Group management.

The table presented below classifies the Group’s financial liabilities into relevant maturity groupings based on the remaining period at December 31, 2017 to the contractual maturity date. Group entities do not have derivative financial liabilities. The amounts presented in the table represent the projected undiscounted cash flows.

 

     Less than 1
year
     Between 1
and 3 years
     Between 3
and 5 years
 
     U.S. dollars in thousands  

As of December 31, 2017:

        

Borrowings—Variable interest

     311,215        157,598        31,973  

Borrowings—Fixed interest

     67,030        54,774        22,112  

Liability for put option for the shareholders of a subsidiary

     7,560        50,367        51,011  

Accounts payable and accruals

     231,813        926         
  

 

 

    

 

 

    

 

 

 
     617,618        263,665        105,096  
  

 

 

    

 

 

    

 

 

 

As of December 31, 2016:

        

Borrowings—Variable interest

     203,233        157,406        48,282  

Borrowings—Fixed interest

     34,074        71,959        28,418  

Liability for put option for the shareholders of a subsidiary

     40,350        18,261        31,746  

Accounts payable and accruals

     190,427        21,105         
  

 

 

    

 

 

    

 

 

 
     468,084        268,731        108,446  
  

 

 

    

 

 

    

 

 

 

 

  c) Liabilities in respect of put options

As part of several acquisition transactions, former owners of the acquired entities were granted an option to sell the Company their remaining shares, and the Company has an option to buy those shares; (the price and the conditions of the call options are identical to the price of the put option). This mechanism exists in the following acquisitions:

1. Sonarome Private Ltd. (“Sonarome”).

2. Amco SP (“Amco”), see note 5j.

 

F-30


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3—FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (continued):

 

3. Ingenieria Alimentaria S.A. De C.V (“Piasa”), see note 5p.

4. Western Flavors Fragrances Production Joint Stock Company, (“WFF”), see note 5d.

5. Brasil Industria E Comercio Ltda, (“SDFLC”), see note 5e.

6. Turpaz Perfume and Flavor Extracts Ltd. (“Turpaz”), see note 5h.

As of December 31, 2017, the total amount of the PUT options is $93,984 thousand. This liability was estimated in accordance with the average EBITDA to be achieved during the period of the agreement. The annual weighted discount rate of the option is 3.3%.

The main unobservable data used by the Company for the purpose of valuing the option is the future EBITDA to be achieved. For the purpose of estimating the value of the liabilities for the options and their update, the Company used its current business results and its forecast.

 

  b. Capital management

Group’s objective is to maintain, as possible, stable capital structure. In the opinion of Group’s management, its current capital structure is stable. Consistent with others in the industry, the Group monitors capital, on the basis of the gearing ratio.

This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including ‘current and non-current borrowings’ as shown in the consolidated statement of financial position) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated statement of financial position plus net debt.

The gearing ratios at December 31, 2017 and 2016 were as follows:

 

     2017     2016  
     U.S. dollars in thousands  

Total borrowings (Note 9)

     634,286       533,780  

Less—cash and cash equivalents (Note 19)

     (118,214     (113,528
  

 

 

   

 

 

 

Net debt

     516,072       420,252  

Total equity

     878,913       664,604  
  

 

 

   

 

 

 

Total capital

     1,394,985       1,084,856  
  

 

 

   

 

 

 

Gearing ratio

     37.0     38.7
  

 

 

   

 

 

 

NOTE 4—CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates, by definition, may not necessarily be equal to the related actual results. The estimates and assumptions with significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

 

  a. Estimate of Impairment of Goodwill

The Group tests annually for impairment of goodwill, in accordance with the accounting policy states in note 2g. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates (Note 8).

 

F-31


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4—CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS (continued):

 

  b. Taxes on Income and Deferred Taxes

The Group is subject to income taxes in a large number of countries. Judgment is required in determining the worldwide provision for income taxes. The Group is involved in transactions and computations in which final tax liabilities cannot be determined with certainty in the normal course of business. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due as a result of the tax audits. Where the final tax outcome of these matters, determined by tax authority is different from the amounts that were initially recorded, such differences may impact the provisions for income tax and deferred tax liabilities in the period in which such determination is made.

The Group recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Group regularly reviews its deferred tax assets for recoverability, based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. If the Group is unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, the Group could be required to eliminate a portion of the deferred tax asset resulting in an increase in its effective tax rate and an adverse impact on operating results.

 

  c. Severance Pay

The present value of the liabilities in respect of severance pay is dependent on several factors that are determined on an actuarial basis in accordance with various assumptions. The assumptions used in the calculation of the net cost (income) in respect of severance pay include, inter alia, the yield rate and discount rate. Changes in those assumptions may influence the carrying amount of the assets and liabilities in respect of severance pay.

The assumption regarding the appropriate discount rate is determined by external actuaries at the end of each year. This discount rate is used in determining the estimated updated value of the future cash flows that would be required to cover the severance pay liabilities. The Company uses the market of high-quality corporate bonds when this market available, and when it is not, government bonds are used instead. Therefore, in determining this rate, the Group uses interest rate in the currency in which the benefits will be paid.

Other key assumptions relating to severance pay liabilities, such as future payroll raise and retirement rates, are partially based on existing market conditions on that time and on past experience.

 

  d. Provisions

Provision for legal liabilities are recorded in the books of accounts in accordance with Group management’s judgment, based on the opinion of its legal advisors, regarding the likelihood that cash outflows will needed to meet the liabilities, and on the basis of the estimate determined by the management regarding the present value of the expected cash outflows required to meet the existing liabilities.

 

F-32


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 5—BUSINESS COMBINATIONS:

 

  a. Acquisition of remaining share capital of subsidiaries

 

  1) Acquisition of the remaining holdings of Vantodio:

On February 1, 2017, The Company exercised its option to acquire the remaining 25% equity interest in Vantodio Holdings Limited, which holds the Russian group “Protein Technologies Ingredients”, from the end of the third year, at a multiple of between 6 and 7 of the average annual EBITDA achieved in the three years prior to the exercise of the option. The Company holds from that date 100% of the share capital of Vantodio. The option was exercised for a total consideration of approximately $40 million. The purchase of the remaining 25% interest stake was financed through bank credit.

 

  2) Acquisition of the remaining holdings of Nutrafur

On June 12, 2017, the Company signed, through a subsidiary, an agreement for the purchase of approx. 21% of the shares of the Spanish company Nutrafur S.A. (“Nutrafur”) from that company’s founding families for US$2.4 million (approx. €2.1 million) such that Frutarom now holds 100% of Nutrafur shares (On September 3, 2015, the Company acquired approx. 79% of the shares of Nutrafur). The transaction was closed upon signing.

 

  3) Acquisition of the remaining holdings of BSA

On July 5, 2017, Frutarom purchased a 5% interest stake in the Canadian company Les Ingredients Alimentaires BSA Inc. (“BSA”) for approximately US$2 million (approx. CAD 2.75 million) and thereby completed acquisition of 100% of the shares in BSA, and this is further to the purchase of 95% of BSA’s share on May 15, 2015.

 

  b. Acquisition of Unique

On February 8, 2017, the Company signed, through a subsidiary, an agreement for the purchase of 100% of the shares of the South African companies Unique Flavors Proprietary Limited and Unique Food Solutions Proprietary Limited (collectively: “Unique”) in consideration (including the taking on of debt) for approx. ZAR 90 million (approx. USD 6.4 million), of which approximately USD 1 million will be paid as deferred payment. The purchase agreement includes a mechanism for future consideration contingent on Unique’s future business performance at approx. ZAR 6.1 million (approx. USD 493 thousand), which was paid after the balance sheet date. The transaction was financed through bank debt.

Unique, which was founded in 2001, is engaged in the development, production and marketing of flavors, with emphasis on savory flavors (the non-sweet spectrum of flavors) and on sweet taste solutions. Unique has an R&D, production and marketing site in Pretoria, South Africa, near Frutarom’s new South African site, and a wide customer base in South Africa and other important emerging markets of the Sub-Saharan region like Ghana, Malawi, Zimbabwe and Mozambique. Unique has a workforce of 64 people.

The cost of acquisition was allocated to the tangible assets, intangible assets and liabilities acquired based on their fair value at the time of acquisition. The intangible assets that were recognized include: product formulas valued at ZAR 14,525 thousand ($1,080 thousand), customer relations at ZAR 16,929 thousand ($1,258 thousand), goodwill at ZAR 66,790 thousand ($4,966 thousand) and software at ZAR 108 thousand ($8 thousand). Product formulas and customer relations are amortized over economic useful lives of 20 years and 10 years, respectively.

 

F-33


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5—BUSINESS COMBINATIONS (continued):

 

Set forth below are the assets and liabilities of Unique at the date of acquisition:

 

     Fair value  
     U.S. dollars
In thousands
 

Current assets:

  

Trade

     2,114  

Inventory

     314  

Others

     97  

Non-current assets:

  

Property, plant and equipment

     173  

Intangible assets

     7,312  

Current liabilities :

  

Trade payables

     (1,567

Other account payables

     (1,326

Short-term loans

     (48

Non-current liabilities:

  

Deferred taxes

     (700
  

 

 

 
     6,369  
  

 

 

 

From the date it was included in the consolidated financial statements of the Company through December 31, 2017, the acquired operations have yielded revenues of $9,159 thousand. In the course period, Unique and Frutarom South Africa were merged into a single entity, which operates under a single management.

 

  C. Acquisition of Rene Laurent

On April 4, 2017, the Company signed an agreement for the purchase of 100% of the French Company “René Laurent” in consideration of approx. EUR 20 million (approx. USD 21 million). The transaction was closed upon the signing of the agreement and was financed through bank debt.

Founded in 1885, René Laurent engages in the development, production and marketing of flavors and natural extracts. René Laurent has two production sites (one focusing on sweet flavors and the other on savory flavors), and an R&D center near Cannes, in Grasse, France, plus a production site near Casablanca, Morocco. René Laurent has approximately 100 employees.

The cost of acquisition was allocated to tangible assets, intangible assets and liabilities acquired based on their fair value at the time of the acquisition. The intangible assets that were recognized include: product formulas amounting to EUR 1,763 thousand ($1,880 thousand), customer relations amounting to EUR 2,870 thousand ($3,060 thousand) and goodwill amounting to EUR 9,553 thousand ($10,186 thousand). Product formulas and customer relations are amortized over economic useful lives of 20 years and 10 years, respectively.

 

F-34


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5—BUSINESS COMBINATIONS (continued):

 

Set forth below are the assets and liabilities of Rene Laurent at the date of acquisition:

 

     Fair value  
     U.S. dollars
In thousands
 

Current assets:

  

Cash and cash equivalents

     969  

Trade

     3,665  

Inventory

     4,110  

Others

     232  

Non-current assets:

  

Property, plant and equipment

     1,515  

Intangible assets

     15,126  

Current liabilities :

  

Trade payables

     (1,765

Other payables

     (784

Non-current liabilities:

  

Other long-term payables

     (706

Deferred taxes

     (1,412
  

 

 

 
     20,950  
  

 

 

 

From the date it was included in the consolidated financial statements of the Company through December 31, 2017, the acquired operations have generated revenues of $10,891 thousand and net profit of $142 thousand (net of acquisition costs).

 

  d. Acquisition of WFF

On April 5, 2017, the Company signed an agreement for the purchase of 60% of the Vietnamese company Western Flavors Fragrances Production (“WFF”) for approx. VND 23.9 billion (approx. USD 1.1 million). The purchase agreement includes a mutual option for purchasing the remaining WFF shares beginning four years from closing the transaction at a price that is based on the business performance of WFF during that period. The transaction was financed by own resources.

WFF was founded in 2003, has 44 employees and engages in the development, production and marketing of flavors. WFF has a plant and laboratory in Ho Chi Minh City in southern Vietnam and a sales and marketing office in Hanoi, in the country’s northern region. Frutarom intends to build a modern new flavors plant in Ho Chi Minh City, which will enable it to significantly expand its activity in the Vietnamese market and in the emerging markets of the region.

The cost of acquisition was allocated to tangible assets, intangible assets and liabilities that were acquired based on their fair value at the time of the acquisition. The intangible assets that were recognized include: product formulas valued at VND 7,741 thousand ($342 thousand), customer relations at VND 15,180 thousand ($671 thousand) and goodwill at VND 10,445 thousand ($462 thousand). Product formulas and customer relations are amortized over economic useful lives of 20 years and 10 years, respectively.

 

F-35


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5—BUSINESS COMBINATIONS (continued):

 

Set forth below are the assets and liabilities of WFF at the date of acquisition:

 

     Fair value  
     U.S. dollars
In thousands
 

Current assets:

  

Cash and cash equivalents

     114  

Trade

     351  

Inventory

     743  

Others

     140  

Non-current assets:

  

Property, plant and equipment

     411  

Intangibles

     1,475  

Current liabilities :

  

Trade payables

     (392

Other payables

     (444

Non-current liabilities:

  

Other long-term payables

  

Deferred taxes

     (223

Other long-term payables

     (1,118
  

 

 

 
     1,057  
  

 

 

 

From the date it was included in the consolidated financial statements of the Company through December 31, 2017, the acquired operations have generated $726 thousand in revenue and $74 thousand in net income (net of acquisition costs).

 

  e. Acquisition of SDFLC

On June 22, 2017, the Company signed an agreement for the purchase of 80% of the shares of the Brazilian company SDFLC Brasil Indústria E Comércio Ltda. (“SDFLC”), in exchange for approx. BRL 98 million (approx. US$29.5 million). The purchase agreement includes debt and a contingent consideration mechanism that is based on SDFLC future business performance, which, as of the date of acquisition, is estimated at approximately BRL 10 million. Additionally, the agreement includes a mutual option for acquiring the remaining shares starting two and a half years from closing date of the transaction at a price based on SFCLC’s business performance. The transaction was closed upon signing and was financed through bank debt.

SDFLC was founded in 2001 in the city of Sete Lagoas in the Brazilian state of Minas Gerais and is a provider of taste solutions for ice creams and desserts in Brazil. SDFLC employs about 90 workers and serves around 2,250 customers in Brazil, including independent artisan ice cream makers, multinationals, food processing companies and leading dining chains.

The cost of acquisition was allocated to tangible assets, intangible assets and liabilities that were acquired based on their fair value at the time of the acquisition. The intangible assets that were recognized include: product formulas valued at BRL 16,049 thousand ($4,812 thousand), customer relations at BRL 52,988 thousand ($15,884 thousand), goodwill at BRL 120,983 thousand ($36,271 thousand) and software at BRL 39 thousand ($14 thousand). Product formulas and customer relations are amortized over economic useful lives of 20 years and 10 years, respectively.

 

F-36


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5—BUSINESS COMBINATIONS (continued):

 

Set forth below are the assets and liabilities of SDFLC as at the date of acquisition:

 

     Fair value  
     U.S. dollars
In thousands
 

Current assets:

  

Cash and cash equivalents

     38  

Trade

     2,154  

Inventory

     1,786  

Others

     264  

Non-current assets:

  

Property, plant and equipment

     2,613  

Intangible assets

     56,981  

Current liabilities :

  

Bank credit and loans

     (219

Trade payables

     (717

Other account payables

     (7,036

Non-current liabilities:

  

Deferred taxes

     (4,329

Long-term other account payables

     (20,198

Long-term loans

     (1,908
  

 

 

 
     29,429  
  

 

 

 

From the date it was included in the consolidated financial statements of the Company through December 31, 2017, the acquired operations have generated $15,983 thousand in revenue and $3,844 thousand in net income (net of acquisition costs).

 

  f. Acquisition of F&E

On August 14, 2017, the Company signed an agreement for the purchase of 100% of the shares of the UK Company Flavours and Essences (UK) Ltd. (“F&E”) for approximately £15.6 million (approximately US$20.3 million) and a contingent consideration mechanism based on F&E’s future business performance over the period of three years from the purchase date. The transaction was closed upon signing and was financed through bank debt.

F&E, which was founded in 1998, is engaged in the development, production and marketing of flavors and natural coloring. F&E operates a production site and R&D center in Blackburn, England, employs 41 people, and has a broad customer base in Europe, particularly in the UK and Ireland.

The cost of acquisition was allocated to tangible assets, intangible assets and liabilities that were acquired based on their fair value at the time of the acquisition. The intangible assets that were recognized include: product formulas valued at GBP 2,516 thousand ($3,269 thousand), customer relations at GBP 4,265 thousand ($5,541 thousand) and goodwill at GBP 10,001 thousand ($12,993 thousand). Product formulas and customer relations are amortized over economic useful lives of 20 years and 10 years, respectively.

 

F-37


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5—BUSINESS COMBINATIONS (continued):

 

Set forth below are the assets and liabilities of F&E as at the date of acquisition:

 

     Fair value  
     U.S. dollars
In thousands
 

Current assets:

  

Cash and cash equivalents

     2,529  

Trade

     3,879  

Inventory

     1,774  

Non-current assets:

  

Property, plant and equipment

     575  

Intangible assets

     21,803  

Current liabilities :

  

Trade payables

     (1,855

Other payables

     (1,933

Non-current liabilities:

  

Long-term other payables

     (5,010

Deferred taxes

     (1,459
  

 

 

 
     20,303  
  

 

 

 

From the date it was included in the consolidated financial statements of the Company through December 31, 2017, the acquired operations have generated $8,634 thousand in revenue and $1,989 thousand in net income (net of acquisition costs).

 

  g. Acquisition of Muhlehof

On August 21, 2017, the Company signed an agreement for the purchase of 100% of the shares of the Swiss company Mühlehof Gewürze AG (“Muhlehof”) for approx. CHF 6.7 million (approx. $7 million). The transaction was closed upon signing and financed through bank debt.

Muhlehof, which was founded in 1979, is engaged in the development, production and marketing of savory taste solutions (the non-sweet spectrum of flavors), with emphasis on convenience foods and meats. Muhlehof, with 9 employees, has a site in Switzerland for development, manufacturing and marketing which is included among the acquired assets.

The cost of acquisition was allocated to tangible assets, intangible assets and liabilities that were acquired based on their fair value at the time of the acquisition. The intangible assets that were recognized include: product formulas valued at CHF 567 thousand ($592 thousand), customer relations at CHF 593 thousands ($618 thousand), goodwill amounting to CHF 4,407 thousand ($4,597 thousand) and software at CHF 7 thousand ($8 thousand). Product formulas and customer relations are amortized over economic useful lives of 20 years and 10 years, respectively. The determination of the fair value of the assets and liabilities is subject to a final appraisal for the allocation of the purchase prices to the fair value of the assets and liabilities; this appraisal has not yet been completed as of the date of approval of these financial statements.

 

F-38


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5—BUSINESS COMBINATIONS (continued):

 

Set forth below are the assets and liabilities of Muhlehof as at the date of acquisition:

 

     Fair value  
     U.S. dollars
In thousands
 

Current assets:

  

Cash and cash equivalents

     463  

Trade

     257  

Inventory

     246  

Other receivables

     97  

Non-current assets:

  

Property, plant and equipment

     480  

Intangible assets

     5,815  

Current liabilities :

  

Trade payables

     (117

Other payables

     (55

Non-current liabilities:

  

Deferred taxes

     (211
  

 

 

 
     6,975  
  

 

 

 

From the date it was included in the consolidated financial statements of the Company through December 31, 2017, the acquired operations have generated $1,158 thousand in revenue and net income of $108 thousand (net of acquisition costs).

 

  h. Acquisition of Turpaz

On September 6, 2017, Frutarom invested in and purchased shares of Turpaz Perfume and Flavor Extracts Ltd. (“Turpaz”) and BKF Perfume Compounding Ltd. (a company that owns 80% of the share capital of Turpaz, “BKF”) and became owner of approx. 51% of share capital and voting rights in Turpaz. The consideration paid by Frutarom for the shares is approx. NIS 14.5 million (approx. US$4.1 million), and in addition, Frutarom injected an investment of approx. NIS 27 million (approx. US$7.4 million) into BKF. The purchase and investment agreement includes a mutual option for Frutarom to purchase the remaining shares of Turpaz and BKF starting four years from the date of closing the transaction at a price that will be based on their future business performance in the eighth quarters preceding the notification to realize the option. Considering the mutual option terms, the group has recognized 100% of the share capital of Turpaz and the related liability due to the capitalized value of the option. The transaction was financed through bank debt.

Turpaz is engaged mainly in the development, production and marketing of fragrance solutions. Turpaz, with 16 employees, has an R&D, manufacturing and marketing site in Israel and recently opened a center for R&D, production, sales and marketing in New Jersey.

The cost of acquisition was allocated to tangible assets, intangible assets and liabilities that were acquired based on their fair value at the time of the acquisition. The intangible assets that were recognized include: product formulas valued at NIS 6,834 thousand ($1,900 thousand), customer relations at NIS 11,297 thousand ($3,142 thousand) and goodwill at NIS 82,253 thousand ($22,873 thousand). The product formulas and customer relations are amortized over economic useful lives of 20 years and 10 years, respectively. The determination of the fair value of the assets and liabilities is subject to a final appraisal for the allocation of the purchase prices to the fair value of the assets and

 

F-39


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5—BUSINESS COMBINATIONS (continued):

 

liabilities; this appraisal has not yet been completed as of the date of approval of these financial statements.

Set forth below are the assets and liabilities of Turpaz as at the date of acquisition:

 

     Fair value  
     U.S. dollars
In thousands
 

Current assets:

  

Cash and cash equivalents

     8,713  

Trade

     2,057  

Inventory

     1,171  

Other receivables

     239  

Non-current assets:

  

Property, plant and equipment

     111  

Intangible assets

     27,915  

Current liabilities :

  

Trade payables

     (636

Other payables

     (1,672

Non-current liabilities:

  

Bank loans

     (1,770

Other long-term payables

     (23,372

Deferred taxes

     (1,215
  

 

 

 
     11,541  
  

 

 

 

From the date it was included in the consolidated financial statements of the Company through December 31, 2017, the acquired operations have generated revenues of $2,520 thousand and net income of $328 thousand (net of acquisition costs).

 

  i. Acquisition of Pollena

On December 19, 2017, Frutarom purchased 99.96% of the shares in the Polish company Fabryka Substancji Zapachowych “Pollena-Aroma” Sp, z.o.o. (“Pollena-Aroma”) for approx. $8.4 million (approx. PLN 29.2 million). The transaction was closed upon signing and financed from own sources.

Pollena-Aroma, established in 1956, is engaged in the development, production and marketing of flavors, fragrances and specialty ingredients for the aromatherapy and natural cosmetics industries. Pollena-Aroma operates a modern advanced production site near Warsaw, which includes an R&D center and labs, and state-of-the-art production with robotic equipment in the US, and which will become a significant R&D, production, and sales and marketing center for Frutarom’s European fragrances activity. Pollena-Aroma has 64 employees and a large customer base in Europe, particularly in Poland and Ukraine.

The cost of acquisition was allocated to tangible assets, intangible assets and liabilities that were acquired based on their fair value at the time of the acquisition. The intangible assets that were recognized include: product formulas valued at PLN 2,356 thousand ($676 thousand), customer relations at PLN 30 thousand ($9 thousand), goodwill at PLN 7,810 thousand ($2,240 thousand) and software at PLN 62 thousand ($17 thousand).

 

F-40


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5—BUSINESS COMBINATIONS (continued):

 

Product formulas and customer relations are amortized over economic useful lives of 20 years and 10 years, respectively. The determination of the fair value of the assets and liabilities is subject to a final appraisal for the allocation of the purchase prices to the fair value of the assets and liabilities; this appraisal has not yet been completed as of the date of approval of these financial statements.

Set forth below are the assets and liabilities of Pollena as at the date of acquisition:

 

     Fair value  
     U.S. dollars
In thousands
 

Current assets:

  

Cash and cash equivalents

     374  

Trade

     1,240  

Inventory

     893  

Other receivables

     57  

Non-current assets:

  

Property, plant and equipment

     6,390  

Intangible assets

     2,942  

Current liabilities :

  

Trade payables

     (680

Other payables

     (782

Non-current liabilities:

  

Other long-term payables

     (1,928

Deferred taxes

     (118
  

 

 

 
     8,388  
  

 

 

 

The results of Pollena will be consolidated as of December 31, 2017. Therefore, the results of this company have no effect on income and loss for 2017.

Acquisitions carried out in 2016:

 

  j. Acquisition of control in Amco SP.Z.O.O

On January 11, 2016, Frutarom completed acquisition of 75% of share capital of the Polish company Amco Sp. z.o.o, (hereafter – “Amco”) in consideration of $22.4 million (PLN 88.5 million). The purchase agreement includes a mutual option for acquiring the remaining shares starting two and a half years from closing date of the transaction at a price that will be based on Amco’s business performance. Considering the mutual terms of the option, the Company recognized the full implicit liability of the option realization.

 

  k. Acquisition of Wiberg

On January 28, 2016, Frutarom completed the acquisition of 100% of the shares of Sagema GmbH of Austria and Wiberg GmbH of Germany (including Wiberg’s 50% ownership stake in a Canadian subsidiary (Wiberg Corporation) and 51% ownership stake in a Turkish subsidiary (WIBERG BAHARAT SANAYİ VE TİCARET ANONİM SİRKETİ which was subsequently fully acquired) (hereafter collectively: “Wiberg”) in consideration of approx. $129.9 million (€119.1 million). The purchase was fully funded using bank funding.

 

F-41


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5—BUSINESS COMBINATIONS (continued):

 

  l. Acquisition of Grow Company Inc.

On January 11, 2016, the Company signed an agreement for the acquisition of 100% of the shares of the US-based company Grow Company Inc. (hereafter – “Grow”) in consideration of $20 million. The transaction was closed on the date of signing the agreement and was financed using bank debt. The purchase agreement included a contingent consideration mechanism based on the Company’s business performance in 2016 and completed in late first quarter of 2017 in the amount of $10,800 thousand.

 

  m. Acquisition of Extrakt Chemie

On May 2, 2016, the Company signed an agreement for the acquisition of 100% of the rights and the general partner of the German partnership Extrakt Chemie Dr. Bruno Stellmach GmbH &Co. KG (hereafter—“Extrakt Chemie”) as well as the property on which Extrakt Chemie’s plant is situated in consideration for approx. $6.3 million in cash (approx. €5.4 million) plus the assumption of debt (net) at approx. $1.4 million (approx. €1.2 million). The purchase agreement includes a mechanism for future consideration conditional on the business performance of Extrakt Chemie that will be paid in 2018.

 

  n. Acquisition of Redbrook Ingredient Services Limited

On August 2, 2016, the Company signed, through a subsidiary, an agreement for the purchase of 100% of shares in the Irish company Redbrook Ingredient Services Limited (“Redbrook”) in exchange for approximately USD 44.8 million (€40 million). The purchase agreement includes a mechanism for additional consideration based on Redbrook’s future business performance.

 

  o. Acquisition of Nardi Aromas

On October 11, 2016, the Company signed, through a subsidiary, an agreement for the purchase of 100% of shares in the Brazilian company Nardi Aromas Ltda. (“Nardi”) in exchange for approximately USD 1.6 million (BRL 5.1 million).

 

  p. Acquisition of Piasa

On November 9, 2016, Frutarom signed, through a subsidiary, an agreement to acquire 75% of share capital of the Mexican company Ingenieria Alimentaria, S.A. De C.V. (“Piasa”), as well as real estate in Monterrey, Mexico, where its central manufacturing site and headquarters are located, in exchange for a cash consideration (including debt) of $15.1 million, and deferred consideration of $2.3 million. The purchase agreement includes a mechanism for additional consideration based on business performance in 2016. Additionally, the agreement included a mutual option to acquire the remaining shares beginning from 5 years after closing at a price that is based on business performance of the Company. Considering the mutual terms of the option, the Company recognized the full implicit liability of option realization.

 

  q. Had the acquisitions carried out in 2017 and 2016 been completed on January 1, 2016, based on the unaudited information provided by owners of acquirees based on the pre-acquisition accounting activity, the revenue of the Group for the year ended December 31, 2016 would have been $1,292,086 thousand, and net income for that year would have been $137,736 thousand. Based on the above, the revenue of the Group for the year ended December 31, 2017 would have been $1,401,960 thousand, and net income for that year would have been $158,396 thousand.

 

F-42


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5—BUSINESS COMBINATIONS (continued):

 

The above results include interest expenses on loans to finance the acquisition that would have been registered in that period, depreciation and amortization that may have been recognized in that period for amortization of intangible assets and one-off expenses recognized on acquisition date. The aforesaid calculation does not take into account synergies that would result from merger of the acquisitions with activity of the company.

NOTE 6—SEGMENT REPORTING

 

  a. Operating Segments

The core activity of the Group is organized to support management in implementing a worldwide strategy in two major operating activities: Flavors and Fine Ingredients. Another operating activity is Trade and Marketing (each operation is considered a separate reportable segment (Note 2d). Results of operating segments are measured based on operating income.

Frutarom’s Flavors Activity develops, produces, markets and sells high-quality, value added sweet and savory flavors used mainly by manufacturers of food and beverages and other consumer products including flavors and Food Systems products (products combining fruits, vegetables and/or other natural ingredients, including sweet and non-sweet flavors). Frutarom’s Specialty Fine Ingredients Activity develops, produces, markets and sells natural flavor extracts, natural functional food ingredients, natural pharma/nutraceutical extracts, natural algae based biotechnical products, aroma chemicals, specialty essential oils, unique citrus products, natural gums and stabilizers.

The Specialty Fine Ingredients products are sold primarily to the food and beverage, flavor and fragrance, pharmaceutical/nutraceutical, cosmetics and personal care industries.

The Trade and Marketing activity is not considered a core activity, and focuses on trade and marketing of raw materials that are produced by third parties, as part of providing a complete range of solutions and services to customers.

These operations are the basis on which the Group reports its primary segment information.

Segment as data provided to the chief operating decision-maker in respect of the reported segments are as follows:

December 31, 2017:

 

     Flavors
operations
     Fine
ingredients
operations
     Trade and
marketing

operations
     Elimination     Total
Consolidated
 
Income statement information:    U.S. dollars in thousands  

Sales—net:

             

Unaffiliated customers

     1,025,359        246,075        90,962              1,362,396  

Intersegment

            14,047               (14,047      
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total sales and other operating income

     1,025,359        260,122        90,962        (14,047     1,362,396  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment results

     177,680        31,638        1,664        (16     210,966  
  

 

 

    

 

 

    

 

 

    

 

 

   

Financial expenses—net

                24,606  

Taxes on income

                34,797  
             

 

 

 

Net income

                151,563  
             

 

 

 

 

F-43


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6—SEGMENT REPORTING (continued):

 

December 31, 2016:

 

     Flavors
operations
     Fine
ingredients
operations
     Trade and
marketing

operations
     Elimination     Total
Consolidated
 
Income statement information:    U.S. dollars in thousands  

Sales—net:

             

Unaffiliated customers

     846,517        221,030        79,494              1,147,041  

Intersegment

            6,830               (6,830      
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total sales and other operating income

     846,517        227,860        79,494        (6,830     1,147,041  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment results

     125,825        21,549        1,938        (56     149,256  
  

 

 

    

 

 

    

 

 

    

 

 

   

Financial expenses—net

                12,841  

Taxes on income

                25,346  
             

 

 

 

Net income

                111,069  
             

 

 

 

December 31, 2015:

 

     Flavors
operations
     Fine
ingredients
operations
     Trade and
marketing

operations
     Elimination     Total
Consolidated
 
Income statement information:    U.S. dollars in thousands  

Sales—net:

             

Unaffiliated customers

     607,534        180,918        84,344              872,796  

Intersegment

            4,026               (4,026      
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total sales and other operating income

     607,534        184,944        84,344        (4,026     872,796  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment results

     108,751        18,900        2,870        (267     130,254  
  

 

 

    

 

 

    

 

 

    

 

 

   

Financial expenses—net

                12,197  

Taxes on income

                21,972  
             

 

 

 

Net income

                96,085  
             

 

 

 

 

  a. Additional information:

1) Geographical Segment Information

As of December 31, 2017, Frutarom operated 72 production sites, 90 research and development laboratories, and 109 sales offices in Europe, North America, Latin America, Israel, Asia, Africa and New Zealand, and markets and sells over 70,000 products to more than 30,000 customers in more than 150 territories.

 

F-44


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6—SEGMENT REPORTING (continued):

 

2) Sales by Destination Based on End Customer Location

The following is information on the distribution of the Company’s sales by market:

 

     Year ended December 31  
     2017      2016      2015  
     U.S. dollars in thousands  

Emerging Market*

     585,619        470,247        384,804  

West Europe**

     494,149        424,292        281,745  

USA and North America***

     195,280        173,216        136,633  

Other

     87,348        79,286        69,614  
  

 

 

    

 

 

    

 

 

 

Total consolidated sales

     1,362,396        1,147,041        872,796  
  

 

 

    

 

 

    

 

 

 

 

  * Sales in Russia amounted to $160,363 thousand, $150,370 thousand and $142,885 thousand in 2017, 2016 and 2015, respectively.
  ** Sales in Germany amounted to $134,964 thousand, $121,261 thousand and $66,018 thousand in 2017, 2016 and 2015, respectively.
  *** Sales in the USA amounted to $149,579 thousand, $132,649 thousand and $111,767 thousand in 2017, 2016 and 2015, respectively.

NOTE 7—PROPERTY, PLANT AND EQUIPMENT

 

  a. Composition of assets, grouped by major classifications and changes therein in 2017 is as follows:

 

    Cost     Accumulated depreciation     Depreciated
balance
 
    Balance at
beginning
of year
    Additions
during
the year
    Retirements
during the
year
    Other*     Balance
at end
of year
    Balance
at
beginning
of year
    Additions
during
the year
    Retirements
during the
year
    Other*     Balance
at end
of year
    December 31
2017
 
    U.S. dollars in thousands     U.S. dollars in thousands  

Land and buildings

    223,850       9,106       (863     32,869       264,962       71,686       3,583       (59     8,471       83,681       181,281  

Machinery and equipment

    265,112       18,867       (10,949     31,443       304,473       183,469       14,078       (10,248     22,064       209,363       95,110  

Vehicles and lifting equipment

    10,716       1,756       (2,445     1,309       11,336       6,713       1,488       (2,086     665       6,780       4,556  

Furniture and office equipment (including computers)

    48,595       3,498       (1,572     3,895       54,416       24,236       2,568       (1,290     3,772       29,286       25,130  

Leasehold improvements

    17,479       1,167       (796     1,206       19,056       10,828       1,404       (695     720       12,257       6,799  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    565,752       34,394       (16,625     70,722       654,243       296,932       23,121       (14,378     35,692       341,367       312,876  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-45


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7—PROPERTY, PLANT AND EQUIPMENT (continued):

 

  a. Composition of assets, grouped by major classifications and changes therein in 2016 is as follows:

 

    Cost     Accumulated depreciation     Depreciated
balance
 
    Balance at
Beginning
of year
    Additions
During
the year
    Retirements
during the
year
    Other*     Balance
at end
of year
    Balance
at
beginning
of year
    Additions
during
the year
    Retirements
during the
year
    Other*     Balance
at end
of year
    December 31
2016
 
    U.S. dollars in thousands     U.S. dollars in thousands  

Land and buildings

    188,582       6,440       (1,328     30,156       223,850       55,705       6,804       (38     9,215       71,686       152,164  

Machinery and equipment

    240,587       14,502       (21,801     31,824       265,112       171,428       12,375       (19,318     18,984       183,469       81,643  

Vehicles and lifting equipment

    8,963       2,016       (1,628     1,365       10,716       5,689       1,326       (1,197     895       6,713       4,003  

Furniture and office equipment (including computers)

    43,694       3,503       (5,538     6,936       48,595       24,059       385       (5,342     5,134       24,236       24,359  

Leasehold improvements

    19,033       2,032       (5,880     2,294       17,479       11,192       1,366       (3,289     1,559       10,828       6,651  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    500,859       28,493       (36,175     72,575       565,752       268,073       22,256       (29,184     35,787       296,932       268,820  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Arising from acquisition of subsidiaries and operations and from translation of foreign-currency financial statements of subsidiaries.

 

  b. Lease of land

 

  1) Frutarom Ltd. has a leasehold right in a land property located in the Akko Industrial Zone and the Haifa Bay. Net discounted lease payments as at December 31, 2017, in respect of the said land properties is $981 thousand (2016—$1,013 thousand). The lease period is 49 years ending in 2032 and 2042, respectively. Frutarom Ltd. has a right to extend the lease for an additional 49-year period.

 

  2) A subsidiary in China has “Land Use Rights” to land properties in China. The rights are for a period of 50 years ending in 2046 and 2052. Net discounted lease payments as at December 31, 2017 in respect of the said land properties is approximately $135 thousand (2016—$143 thousand) and $1,062 (2016—$1,041), respectively.

 

  3) In 2015, a subsidiary in China acquired “Land Use Rights”. The rights are for a period of 50 years. Net discounted lease payments as at December 31, 2017, in respect of the land property is $1,211 thousand.

 

F-46


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 8—INTANGIBLE ASSETS:

 

     Original amount      Amortized balance  
     December 31      December 31  
     2017      2016      2017      2016  

Know-how and product formulas

     161,999        136,903        119,324        104,509  

Goodwill

     593,168        456,944        589,250        454,687  

Customer relations

     177,926        137,010        116,628        94,688  

Trademarks

     309        500        18        58  

Computer software

     30,607        31,305        4,006        3,839  
  

 

 

    

 

 

    

 

 

    

 

 

 
     964,009        762,662        829,226        657,781  
  

 

 

    

 

 

    

 

 

    

 

 

 

Composition of Intangible Assets, Grouped by Major Classifications and Changes Therein is as Follows:

 

     Computer
software
    Know-
how and
product
formulas
    Goodwill*     Customer
relations
    Trademarks     Total  
     U.S. dollars in thousands  

Balance as of January 1, 2016—net

     4,294       73,112       335,538       60,707       156       473,807  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in the year ended December 31, 2016:

            

Acquisitions

     950       297                   97       1,344  

Retirements during the year

     (100                       (5     (105

Additions due to business combinations

     588       39,382       129,341       48,252             217,563  

Foreign exchange gains and losses

     (35     (1,856     (11,034     (2,139     (94     (15,158

Changes in the excess of cost of acquisition

     347             842                   1,189  

Annual amortization charge (Note 2f)

     (2,205     (6,426           (12,132     (96     (20,859
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing net book amount

     3,839       104,509       454,687       94,688       58       657,781  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in the year ended December 31, 2017:

            

Acquisitions

     1,669       1,163                   58       2,890  

Retirements during the year

     (141                             (141

Additions due to business combinations

     47       14,549       95,295       30,269       17       140,177  

Foreign exchange gains and losses

     465       6,174       43,111       6,585       (6     56,329  

Changes in the excess of cost of acquisition

     (499     262       (3,843     (54           (4,134

Annual amortization charge (Note 2f)

     (1,374     (7,333           (14,860     (109     (23,676
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing net book amount

     4,006       119,324       589,250       116,628       18       829,226  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-47


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8—INTANGIBLE ASSETS (continued):

 

Test for impairment of goodwill

The goodwill recorded in the Group’s books of accounts arises from acquisitions of subsidiaries and operations carried out by the Group over the years. Goodwill is allocated to the cash-generating units of the Group in accordance with the unit and the business segment from which it arises.

Set forth below is a summary of goodwill allocation between the various cash-generating units:

 

     December 31  
     2017      2016  
     U.S. dollars in
thousands
 

Cash-generating unit 1

     331,870        242,383  

Cash-generating unit 2

     156,677        115,628  

Cash-generating unit 3

     58,325        56,276  

Cash-generating unit 4

     42,378        40,400  
  

 

 

    

 

 

 

Total

     589,250        454,687  
  

 

 

    

 

 

 

The Company has 6 cash-generating-units, 4 of which have goodwill. The Company’s management continuously reviews the structure of its cash-generating units and adjust it to allow development of its business.

The changes in goodwill between the years are due to acquisitions of new companies/operations, and changes in the exchange rate of the currencies of the foreign operations compared to the U.S. dollar, as explained in Notes 5 and 2c-4.

The recoverable amount of a cash-generating unit is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on past results of the unit, its budget for the following year and the projection for future years, cash flows from the fifth year are extrapolated using a grow rate of 2.5%-3%, according to the activity area of the cash generating unit, which does not exceed the long-term growth rate for the food business and the relevant areas, in which the Group operates.

The average discount rate taken into account in the calculation is 9.1% before taxes.

Group management determines profit margins based on past performance and its expectations for development of each cash-generating units.

The recoverable amounts of cash-generating unit 1, 2 and 3 were calculated and examined by an external assessor, whereas the recoverable amount of cash-generating unit 4 was calculated and examined by Group management.

The results of the above analysis show that the value of goodwill of each of the said cash-generating units has not been impaired, both according to the basic calculations and calculations performed for the purpose of sensitivity test.

 

F-48


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 9—BORROWINGS

 

     December 31  
     2017      2016  
     U.S. dollars
in thousands
 

Non-current borrowings

     262,151        299,576  
  

 

 

    

 

 

 

Current borrowings:

     

Current maturities of long-term loans

     213,469        174,534  

Bank borrowings

     158,666        59,670  
  

 

 

    

 

 

 
     372,135        234,204  
  

 

 

    

 

 

 

Total borrowings

     634,286        533,780  
  

 

 

    

 

 

 

Bank borrowings as of December 31, 2017 mature until 2024 and bear average interest of 1.47% according to the loan terms and LIBOR rates as of December 31, 2017.

The exposure of the Group’s cash flows to interest rate changes is dependent at the rate of LIBOR-Euro, LIBOR-Dollar, LIBOR-Swiss franc and LIBOR-Pound Sterling and it is updated on a quarterly basis.

Due to the above, the fair value of current and non-current borrowings is equal to their carrying amount, as the impact of discounting is not significant. The fair values are based on cash flows discounted by the borrowings’ discount rate.

The carrying amounts of the Group’s borrowings are denominated in the following currencies:

 

     Weighted
average interest
rates*
    December 31  
       2017      2016  
       U.S. dollars in
thousands
 

Pound sterling

     1.75     99,784        56,481  

Dollars

     2.71     170,008        121,087  

Euro

     1.04     263,789        282,647  

Swiss Franc

     0.54     96,088        71,357  

Other currencies

     6.50     4,617        2,208  
    

 

 

    

 

 

 
       634,286        533,780  
    

 

 

    

 

 

 

 

  * Interest rates as of December 31, 2017.

Long-term liabilities (net of current maturities) mature in the following years after the balance sheet date:

 

     2017      2016  
     U.S. dollars in
thousands
 

Second year

     114,709        171,420  

Third year

     94,232        54,946  

Fourth year

     23,168        64,498  

Fifth year

     30,042        8,712  
  

 

 

    

 

 

 
     262,151        299,576  
  

 

 

    

 

 

 

 

F-49


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9—BORROWINGS (continued):

 

The Group has several loans, in respect of which it has undertaken to meet certain financial covenants (see note 14). As of December 31, 2017, the Group is in compliance with all required financial covenants.

NOTE 10—RETIREMENT BENEFIT OBLIGATION:

 

  a. Labor laws and agreements in Israel and abroad require the Company and part of its subsidiaries to pay severance pay and/or pensions to employees dismissed or retiring in certain other circumstances. Group companies’ liability is covered mainly by regular contributions to defined contribution plans. The amounts funded as above are not reflected in the balance sheet since they are not under the control and management of the companies.

 

  b. Under the agreement with its employees, the U.S. subsidiary had a defined benefit plan. As part of the collective agreement signed between the Company’s subsidiary and the labor union on October 13, 2000, the U.S. subsidiary suspended the said plan and joined, as from that date, a comprehensive pension plan of the labor union, which is a defined contribution plan.

The U.S. subsidiary will continue funding its existing liabilities under the suspended pension plan. The amount of retirement benefit obligation and amounts funded, as presented in the consolidated accounts, reflect, inter alia, the U.S. subsidiary’s liability in respect of the suspended plan.

 

  c. The Swiss and German subsidiaries have a liability for payment of pension to employees in Switzerland and Germany under a defined benefit plan. The said liabilities have been transferred to these subsidiaries as part of the acquisition of subsidiaries in 2003 and 2007, respectively. The subsidiaries make contributions to pension plans in respect of these liabilities. The amount of the liability for pension (net) in the balance sheet reflects the difference between the liability for pension payments and the assets of the pension fund.

 

  d. The Company’s severance pay liability in respect of Israeli employees who are covered for that purpose under Section 14 of the Severance Pay Law is covered by regular contributions to defined contribution plans. The amounts funded as above are not reflected in the consolidated statement of financial position.

 

  e. Amounts charged to the income statement in respect of defined benefit plan in 2017, 2016 and 2015 are $2,351 thousand, $2,493 thousand and $2,468 thousand, respectively.

 

F-50


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10—RETIREMENT BENEFIT OBLIGATION (continued):

 

Changes in net liability (asset):

 

     Present value
of obligation
     Fair value of
plan assets
     Net liability
(asset)
 
     US dollars in thousands  

Balance as of January 1, 2017

     63,739        (28,699      35,040  
  

 

 

    

 

 

    

 

 

 

Current service cost

     2,351               2,351  

Interest expenses (income)

     733        (295      438  

Past service cost

     (1,837             (1,837
  

 

 

    

 

 

    

 

 

 
     1,247        (295      952  
  

 

 

    

 

 

    

 

 

 

Remeasurements of the net liability (asset):

        

Return on plan assets, excluding amounts included in interest expense (income)

            (1,655      (1,655

Loss (gain) from change in demographic assumptions

     8               8  

Loss (gain) from change in financial assumptions

     (787             (787

Loss (gain) from experience adjustments

     (1,012             (1,012
  

 

 

    

 

 

    

 

 

 
     (1,791      (1,655      (3,446
  

 

 

    

 

 

    

 

 

 

Financial statements translation gains and losses

     4,374        (1,345      3,029  

Acquisition of subsidiaries

        

Employer’s contributions

     745        (1,706      (961

Benefit payments

     (3,136      2,528        (608
  

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2017

     65,178        (31,172      34,006  
  

 

 

    

 

 

    

 

 

 

 

F-51


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10—RETIREMENT BENEFIT OBLIGATION (continued):

 

 

     Present value
of obligation
     Fair value of
plan assets
     Net liability
(asset)
 
     US dollars in thousands  

Balance as of January 1, 2016

     61,499        (29,279      32,220  
  

 

 

    

 

 

    

 

 

 

Current service cost

     2,493               2,493  

Interest expenses (income)

     788        (303      485  

Other

     63               63  
  

 

 

    

 

 

    

 

 

 
     3,344        (303      3,041  
  

 

 

    

 

 

    

 

 

 

Remeasurements of the net liability (asset):

        

Return on plan assets, excluding amounts included in interest expense (income)

            (358      (358

Loss (gain) from change in demographic assumptions

     (980             (980

Loss (gain) from change in financial assumptions

     1,179               1,179  

Loss (gain) from experience adjustments

     (1,200             (1,200
  

 

 

    

 

 

    

 

 

 
     (1,001      (358      (1,359
  

 

 

    

 

 

    

 

 

 

Financial statements translation gains and losses

     (1,757      709        (1,048

Acquisition of subsidiaries

     3,855               3,855  

Employer’s contributions

     835        (2,128      (1,293

Benefit payments

     (3,036      2,661        (375
  

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2016

     63,739        (28,698      35,041  
  

 

 

    

 

 

    

 

 

 

The following amounts were recognized in the statement of financial position in relation to post-employment defined benefit plans:

 

     December 31  
     2017      2016  
     U.S. dollars in
thousands
 

Present value of obligations arising from fully or partially funded plans

     65,178        63,739  

Fair value of plan assets

     (31,172      (28,698
  

 

 

    

 

 

 

Balance of liability recognized in the statement of financial position

     34,006        35,041  
  

 

 

    

 

 

 

Amounts recognized in the statement of financial position for post-employment defined benefit plans are predominantly non-current and are reported as non-current liabilities.

 

F-52


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10—RETIREMENT BENEFIT OBLIGATION (continued):

 

The Group operates defined benefit schemes in several countries for which the actuarial assumptions vary based on local economic and social conditions. The assumptions used in the actuarial valuations of the defined benefit plans, were as follows:

 

     U.S.A.     Germany and Austria     Switzerland  
     2017     2016     2015     2017     2016     2015     2017     2016     2015  

Discount rates

     3.55     3.55     3.55     1.75     1.67     2.3     0.8     0.7     0.75

Projected salary growth rate

                       1.5     1.17     1.17     1.5     1.5     1.5

The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions, assuming all other assumptions remained unchanged, and which were reasonably possible at the end of the reported period is:

 

     Increase (decrease)
in defined benefit
obligation
 
     December 31, 2017  
     US dollars in
thousands
 

Discount rate:

  

1% increase

     (9,259

1% decrease

     12,042  

Salary growth rate:

  

1% increase

     2,236  

1% decrease

     (1,813

The assumptions concerning future mortality are based on public mortality tables.

Plan assets

The plan assets are composed as follows:

 

     2017      2016  
     US dollars in
thousands
 

Government bonds

     2,425        2,419  

Real estate held abroad

     3,122        2,847  

Qualifying insurance policies

     963        960  

Cash and cash equivalents

     21,941        19,994  

Other

     2,721        2,478  
  

 

 

    

 

 

 

Total

     31,172        28,698  
  

 

 

    

 

 

 

NOTE 11—COMMITMENTS AND CONTINGENT LIABILITIES

 

  a. Commitments:

 

  1) Lease Commitments:

Some of the premises, warehouses, sites and vehicles in the U.K., Germany, Belgium and Israel in the possession of the Group are rented under various operating lease agreements. The lease agreements for the premises will expire on various dates between 2018 and 2022.

 

F-53


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11—COMMITMENTS AND CONTINGENT LIABILITIES (continued):

 

Minimum lease commitments of the Group under the above leases, at rates in effect on December 31, 2017, are as follows:

 

     $ in thousands  

Year ending December 31:

  

2018

     11,165  

2019

     8,885  

2020

     7,381  

2021

     6,816  

2022

     7,845  

2023

     4,436  
  

 

 

 
     46,528  
  

 

 

 

Rental expenses totaled $11,251 thousand, $10,148 thousand and $8,657 thousand, in the years ended December 31, 2017, 2016 and 2015, respectively.

 

  2) Royalty Commitments:

Frutarom Ltd. is committed to pay royalties to the Government of Israel on proceeds from sales of products that were developed with partially funded by Israeli government grants. Under the terms of those grants, the Company is required to pay royalties of 3%-5% on sales of products developed from a project so funded, up to 100% of the amount of the grant received by Frutarom Ltd., linked to the dollar (as from January 1, 1999 – with the addition of annual interest at LIBOR).

The maximum royalty payable by Frutarom Ltd. at December 31, 2017 is $2,044 thousand. The Company has not recorded liability for these royalties due to low likelihood of payment.

In 2017 and 2016, Frutarom Ltd. Has not received Chief Scientist grants.

 

  b. Contingent Liabilities:

The subsidiaries of the Group are not a party to legal procedures in the ordinary course of business, which in the opinion of Group’s management, may have material impact on the Group’s financial position.

NOTE 12—EQUITY:

 

  a. Share Capital:

 

  1) Composed of ordinary shares of NIS 1 par value, as follows:

 

     Number of shares in thousands and
the amount thereof, denominated
in NIS
 
     December 31  
             2017                      2016          

Authorized

     100,000        100,000  
  

 

 

    

 

 

 

Issued and paid up

     59,655        59,335  
  

 

 

    

 

 

 

 

F-54


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12—EQUITY (continued):

 

The Company listed shares are quoted on TASE at NIS 320.5 ($92.44) per share as of December 31, 2017. The global depository receipts (GDRs) representing the Company’s shares are listed on LSE.

 

  2) Ordinary Company shares of NIS 1 par value, are held by the Company and included within the issued and paid up share capital, which constitute 0.2% (142,633 shares) and 0.4% (235,907 shares) of the balance of ordinary issued and paid up shares of this type as of December 31, 2017 and 2016, respectively.

The purchase cost of those shares was deducted from equity within “cost of treasury shares” balance. The shares are held as “treasury shares”.

 

  b. Employee Shares and Option Plans for Senior Employees of Subsidiaries:

 

  1) Commencing in 2003 and on a semi-annual basis, the Board of Directors resolves to allot options to senior managers and other senior employees based on the recommendations of the remuneration committee. In accordance with the Board of Directors’ resolution, and taking into consideration the number of shares available to the Company for the purpose of allotment of options, the Company acquires Company shares in the Stock Exchange and grants the options against those shares.

Commencing in 2012, the options are granted in accordance with the 2012 option plan (“plan 2012”). The options are exercisable in three equal batches at every year-end in the 3 years from date of grant. The Board of Directors has the exclusive right to declare the exercise of the options at an earlier date, and with regards to senior office holders – in accordance with compensation policy, in extraordinary cases and under comprehensive consideration.

The exercise price of the option granted in accordance with the said plans, as determined by the Board of Directors equals a third of the average purchase price paid by the Company for those shares. Options granted under this plan expire at the end of 6 years from date of grant. All tax liabilities arising from grant of options and/or from exercise thereof apply to the employee. The number of shares granted when exercising each option, as well as the exercise price are adjusted in accordance with the changes in the Company’s share capital, including splits of shares, consolidation of shares, dividend distributed in shares and/or creation of new types of shares. This is excluding a number of exceptions where the employment relationship between the Company and an employee is terminated; and in such cases, the employee is entitled to exercise all options exercisable at the date of termination of employment relationship within 90 days from the said date. The remaining unexercised options granted to the employee expire. Options that are not exercisable at the time of termination of the employment relationship expire immediately upon termination of the relationship as above.

Commencing in 2013, the grant of options in accordance with plan 2012 to the Company’s president and CEO (“CEO”) is included in the equity component of the annual bonus; (for details regarding the compensation policy for the CEO, see Company’s report dated June 27, 2013 (reference 2013-01-076263)). Commencing in 2014, and in accordance with plan 2012 to all senior office holders including the Company’s president and CEO is included in the equity component of the annual bonus; (for details regarding the compensation policy that was approved, see the Company’s report dated December 29, 2013 (reference 2013-01-111694)).

The fair value of the options granted in 2012-2017, is based on the following assumptions: expected dividend yield of 0.35%-0.44%, expected standard deviation of 16.94%-25.63%;

 

F-55


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12—EQUITY (continued):

 

risk-free interest rate of 0.67%-3.26% (based on the expected term of the option until exercise): two years in respect of the first batch, three years in respect of the second batch and four years in respect of the third batch.

The 2012 plan is managed in compliance with the provisions in Section 102 to the Israel Income Tax Ordinance. In accordance with the tax alternative chosen by the Company and pursuant to the terms thereof, the company is allowed to deduct the work income component credited to employees, and is not entitled to claim the amounts credited to employees as equity benefits.

 

  2) The following is information on unexercised employee options granted under the 2012 plans as of December 31, 2017:

 

Year of grant

   Number of
vested options
     Number of
unvested
options
     Exercise
price ($)
 

2012

     8,178               3.46-3.50  

2013

     21,030               4.79-5.80  

2014

     20,613               8.27-8.68  

2015

     17,957        12,679        13.90-14.18  

2016

     11,234        23,338        19.00-19.21  

2017

            27,347        19.87-26.44  
  

 

 

    

 

 

    
     79,012        63,364     
  

 

 

    

 

 

    

As of December 31, 2017, the remaining amount of compensation, computed as the excess or the fair value of the said options granted to employees over the exercise price at the date of grant not yet recorded as expenses in the income statements is approximately $815 thousand. The said remaining compensation will be accelerated and charged to income over the remaining vesting period.

As to options granted to the President of the Company—Note 22.a.2.

The changes in the number of outstanding options and their related weighted average exercise prices are as follows:

 

     2017     2016     2015  
     Average
exercise price
in U.S. $
per share
     Options     Average
exercise price
in U.S. $
per share
     Options     Average
exercise price
in U.S. $
per share
     Options  

Outstanding at January 1

     8.25        234,858       4.54        282,132       4.37        314,340  

Granted

     22.65        27,347       17.22        36,462       12.47        43,171  

Forfeited

     7.89        (3,402     8.65        (7,437     6.06        (16,805

Exercised

     5.42        (116,427     3.51        (76,299     3.55        (58,574
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance at December 31

     14.23        142,376       8.25        234,858       4.54        282,132  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

F-56


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12—EQUITY (continued):

 

The following table summarizes information about exercise price and the contractual terms of options outstanding at December 31, 2017:

 

Share rights outstanding     Share rights exercisable  

Exercise

price

     Number
outstanding at
December 31,
2017
     Weighted
average of
remaining
contractual
life
    Weighted
average of
exercise price
     Number
exercisable at
December 31,
2017
     Weighted
average of
remaining
contractual
life
 

      $       

            Years     $             Years  
  3.15        2,211        0.25       3.15        2,211        0.25  
  3.12        5,967        0.75       3.12        5,967        0.75  
  4.32        11,207        1.25       4.32        11,207        1.25  
  5.23        9,823        1.75       5.23        9,823        1.75  
  7.46        6,729        2.25       7.46        6,729        2.25  
  7.83        13,884        2.75       7.83        13,884        2.75  
  12.53        11,786        3.25       12.53        5,574        3.25  
  12.79        18,850        3.75       12.79        12,383        3.75  
  17.13        17,273        4.25       17.13        5,569        4.25  
  17.32        17,299        4.75       17.32        5,665        4.75  
  19.87        15,794        5.25       19.87               5.25  
  26.44        11,553        5.75       26.44               5.75  
  

 

 

         

 

 

    
     142,376             79,012     
  

 

 

         

 

 

    

 

  3) On 15 July 2010, the Company’s Board of Directors approved a plan to grant options to senior managers (“the 2010 plan”).

The options granted under this plan are exercisable in three equal batches at the end of each year commencing in the end of the second year from date of grant thereof. The Board of Directors has the exclusive authority to declare the exercise of the options at an earlier date. Options granted under these plans expire within six years from date of grant. All tax liabilities arising from grant of options and/or from exercise thereof apply to the employee.

The number of shares granted with exercising each option, as well as the exercise price are adjusted in accordance with the changes in the Company’s share capital, including splits of shares, consolidation of shares, dividend distributed in shares and/or creation of new types of shares. This is excluding a number of exceptions where the employment relationship between the Company and an employee is terminated; and in such cases the employee is entitled to exercise all options exercisable at the date of termination of employment relationship within 90 days from the said date. The remaining unexercised options granted to the employee expire. Options that are not exercisable at the time of termination of the employment relationship expire immediately upon termination of the relationship as above. As of this date, every two years, the Board decides on allocation of options to the management and senior employees, based on the recommendation of the compensation committee.

The exercise prices of the options under 2010 plan granted in 2012 are based on the average closing prices of the ten consecutive trading days prior to a Board’s resolution on such allocation. According to the Company’s compensation committee approved on January 14, 2014 by the general meeting of the Company’s shareholders, the exercise prices of any future allocation of options under the 2010 plan shall not be less than the average closing rate of the Company shares in the 30 days preceding the Company’s Board of Directors’ resolution regarding grant of options, plus 5%. The exercise price of

 

F-57


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12—EQUITY (continued):

 

options granted in 2014 and 2016 is based on the compensation policy (applies to all offerees and not only to offerees who are subject to the compensation policy).

The fair value of the options at date of grant—computed using the binomial model in respect to grants made in 2014 and 2016. This value is based on the following assumptions: adjusted standard deviation of 23%-30% per year, risk-free interest rate of 0.13%-1.96% and termination rate (prior to end of the vesting period) of 11.1%-13.5%. This rate is based on a sample of the changes in employment status and rank over several years prior to the grant.

As to the fair value of the options granted to President—see note 22.a.2.

The 2010 plan is managed in compliance with the provisions in Section 102 to the Israel Income Tax Ordinance.

The Group creates deferred taxes for equity grants that are in the scope of IFRS 2 “Share Based Payment” in accordance with the proportionate part of the estimated amount deductible for tax purposes by the Group at date of exercise of benefit by the employee and in respect of which work services were provided by the employee through the date of the statement of financial position (i.e., the estimated overall amount deductible for tax purposes divided by the overall vesting period and multiplied by the vesting period that has elapsed through the date of the statement of financial position). The said deferred taxes are recognized in the income statement.

 

  c. Dividend and Retained Earnings

 

  1) The amounts of dividend paid presented in the statement of changes in shareholders’ equity are net the share of Group companies holding Company shares (Note 2n). The dividend on shares held by Group companies share is $20 thousand, $28 thousand and $29 thousand in 2017, 2016 and 2015, respectively.

In determining the amount of retained earnings available for distribution as a dividend, the Companies Law stipulates that the cost of the Company’s shares acquired by Group companies (that are presented as a separate item on the statement of changes in shareholders’ equity) has to be deducted from the amount of retained earnings presented within equity.

 

  2) In its meeting on March 19, 2018, the Company’s Board of Directors resolved to distribute a NIS 0.50 per share final cash dividend out of retained earnings as of December 31, 2017 , totaling to $8,604 thousand (NIS 29,840 thousand). Frutarom Ltd. does not intend to distribute dividend out of tax-exempt income arising from “approved enterprise”, as explained in Note 13c.

 

  3) The dividend paid in 2017 and 2016 amounted to $7,234 thousand (NIS 0.44 per share) and $6,380 thousand (NIS 0.41 per share). The dividend in respect of the year ended December 31, 2017 at NIS 0.50 per share and totaling $8,604 thousand was discussed in the Company’s Board of Directors, as aforementioned above.

NOTE 13—TAXES ON INCOME:

 

  a. Corporate tax in Israel

 

  1) The Israeli companies of the Group are recognized as foreign-investor companies, and accordingly have elected to keep their books and records in dollars for tax purposes, as permitted under the Income Tax Regulations (Principles for the Bookkeeping of Foreign Invested Companies and of Certain Partnerships and the Determination of Their Taxable Income), 1986.

 

F-58


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13—TAXES ON INCOME (continued):

 

  2) Tax rates

The income of the Company and its Israeli subsidiaries (except for income of “approved enterprises” or “benefited enterprises”, see c. below) is liable to normal corporate tax rate.

The Law for Change of National Priorities (Legislative Amendments for the Achievement of Fiscal Objectives for 2013 and 2014), 2013, which was published in the official gazette on August 5, 2013, enacted, among other things, that the corporate tax rate will be 26.5% in 2014 and thereafter (as to the increase of tax rates on income of preferred enterprises under the Encouragement of Capital Investment Law, 1959, see c. below).

In January 2016, the Law for the Amendment of the Income Tax Ordinance (No. 216) was published, enacting a reduction of corporate tax rate beginning in 2016 and thereafter, from 26.5% to 25%.

In December 2016, the Economic Efficiency Law (Legislative Amendments for Implementing the Economic Policy for the 2017 and 2018 Budget Year), 2016 was published, introducing a gradual reduction in corporate tax rate from 25% to 23%. However, the law also included a temporary provision setting the corporate tax rate in 2017 at 24%. As a result, the corporate tax rate will be 24% in 2017 and 23% in 2018 and thereafter.

As a result of lowering tax rates as above (including the reduction of tax rates on the income of a preferred enterprise, as indicated in b. below), no material change have taken place in deferred tax assets/liabilities of the Group.

Capital gains of the Company are liable to the corporate tax rate beginning in the tax year.

 

  b. Subsidiaries outside Israel

Subsidiaries that are incorporated outside of Israel are assessed for tax under the tax laws in their countries of residence. The principal tax rates applicable to subsidiaries outside Israel are as follows:

Companies incorporated in the USA—tax rate of 36%-42% (Commencing 2018 21%-27%)

Companies incorporated in Germany—tax rate of 30%

Company incorporated in Belgium—tax rate of 34%

Company incorporated in Italy—tax rate of 31.4%

Companies incorporated in the UK—tax rate of 19% (April 2016 through March 2017 tax rate of 20%; commencing April 2017—tax rate of 19%)

Company incorporated in the Switzerland—tax rate of 22%

Company incorporated in Slovenia—tax rate of 19%

Companies incorporated in China—tax rate of 25%

Companies incorporated in Brazil—tax rate of 34%

Company incorporated in South Africa—tax rate of 28%

Companies incorporated in Russia—tax rate of 20%

Companies incorporated in Guatemala—tax rate of 7% of revenues

Company incorporated in the Peru—tax rate of 29.5%

Company incorporated in Canada—tax rate of 26.5%

Companies incorporated in Spain—tax rate of 25%

Companies incorporated in Austria—tax rate of 25%

Companies incorporated in Mexico—tax rate of 30%

Companies incorporated in India—tax rate of 34%

 

F-59


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13—TAXES ON INCOME (continued):

 

  c. Encouragement Laws in Israel

 

  1) Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter—the Law)

Under the law, including Amendment No. 60 to the law that was published in April 2005, by virtue of the “approved enterprise” or “benefited enterprise” status granted to certain enterprises of the Company, and by virtue of the “Foreign Investor Company” status it was granted, Frutarom Ltd. is entitled to various tax benefits.

 

  2) Amendment to the Israel Capital Investment Encouragement Law, 1959

The Economic Policy Law for 2011 and 2012 (Legislation Amendments), 2011, which was approved by the Knesset (the Israeli Parliament) on December 29, 2010 includes an amendment to the Israel Capital Investments Encouragement Law, 1959 (hereinafter—the amendment). The amendment became effective on January 1, 2011.

The amendment sets out new benefit programs to replace those previously provided by the Encouragement of Capital Investment Law, 1959 (hereinafter—the Law) prior to the amendment, as follows: a grants program for entities in Development Area A, and two new tax benefit programs (‘preferred enterprise’ and ‘special preferred enterprise’), which mainly provide a uniform tax rate on the entire preferred income of an entity, as the term preferred income is defined in the Law.

In December 2016, the Economic Efficiency Law (Legislative Amendments for Implementing the Economic Policy for the 2017 and 2018 Budget Year), 2016 was published, introducing two new benefit tracks for the hi-tech industry: “preferred technology enterprise” and “special preferred technology enterprise”.

Frutarom Ltd elected to be governed by the amendment to the Law beginning in 2011, and to take advantage of tax benefits under the “preferred enterprise” track.

According to the Law for Change of National Priorities (Legislative Amendments for Achieving the Budgetary Objectives for 2013-2014), 2013, which was published in the Israeli government official gazette on August 5, 2013 (see a(2) above), the tax rate applicable to preferred income in 2014 and thereafter is as follows: the tax rate applicable to income of companies whose enterprises are located in Development Zone A will be 9% and the tax rate imposed on companies whose enterprises are located other than in Development Zone A will be 16%. As part of the Economic Efficiency Law (Legislative Amendments for Implementing the Economic Policy for the 2017 and 2018 Budget Year), 2016, which was published in December 2016, the tax rate applicable to preferred income of companies whose enterprises are located in Development Zone A will be 7.5% in 2017 and thereafter.

Until the 2010 tax year, the Company took advantage of tax benefits under the Encouragement of Capital Investments prior to its amendment, under which, income of the Company attributable to “preferred enterprises” or “benefited enterprises” it owns were subject to reduced tax rates/tax exemption during the benefits period set by the Law.

In the event of cash dividend distribution from the exempted income, the companies will be liable to pay tax on the grossed-up amount of distributed dividend, according to the tax rate that would have applied to the income in the year it was earned had no exemption been applicable.

 

F-60


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13—TAXES ON INCOME (continued):

 

  3) The Law for the Encouragement of Industry (Taxation), 1969:

 

  a. Frutarom Ltd. is an “industrial company” as defined by this law. As such, Frutarom Ltd. is entitled to claim amortization over 8 years of acquired product formulas, as well as depreciation at increased rates for equipment used in industrial activity as stipulated by regulations published under the inflationary adjustments law, and have done so.

 

  b. The Company and Frutarom Ltd. file a consolidated tax return in accordance with the Law for the Encouragement of Industry. Accordingly, each company is entitled to set-off its tax losses (created commencing the year in which consolidated reporting for tax purposes began) against the taxable income of the other company, subject to certain restrictions.

 

  d. Deferred Income Taxes

 

  1) Composition of deferred taxes as of dates of statement of financial position and changes therein in those years are as follows:

 

          Provisions for
employee rights
                               
    Depreciable
fixed
assets
    Severance
pay
    Vacation
and
recreation
pay
    Inventories     Other     Depreciable
intangibles
    In respect of
Carry forward
tax losses
    Total  
    U.S. dollars in thousands  

Balance at January 1, 2016

    16,074       (5,905     (190     (1,947     (1,355     37,041       (6,231     37,487  

Changes in 2016:

               

Additional taxes as a result of acquisition of subsidiaries

    (278     (72           (167     (61     17,429             16,851  

Changes in the excess of cost of acquisition

                                               

Gains and losses from translation of foreign currency financial statements of subsidiaries

    (198     202             (132     (417     (582     (99     (1,226

Recognized directly in equity

          238                   973                   1,211  

Amounts recognized in income statement

    (1,839     (581     (6     184       (1,030     (786     (3,595     (7,653
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

    13,759       (6,118     (196     (2,062     (1,890     53,102       (9,925     46,670  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in 2017:

               

Additional taxes as a result of acquisition of subsidiaries

                            (12     12,386       (320     12,054  

Changes in the excess of cost of acquisition

                                  (1,538           (1,538

Gains and losses from translation of foreign currency financial statements of subsidiaries

    603       (470           64       155       4,114       209       4,675  

Recognized directly in equity

          730                   512                   1,242  

Amounts recognized in income statement

    (1,977     1,248       (53     466       (263     (7,720     (384     (8,683
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

    12,385       (4,610     (249     (1,532     (1,498     60,344       (10,420     54,420  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-61


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13—TAXES ON INCOME (continued):

 

  2) Deferred taxes are presented in the statements of financial position as follows:

 

     December 31  
             2017                      2016          
     U.S. dollars in thousands  

Among non-current assets

     3,886        3,477  

Among non-current liabilities

     (58,306      (50,147
  

 

 

    

 

 

 
     (54,420      (46,670
  

 

 

    

 

 

 

 

  3) The deferred taxes in respect of Group activities in Israel are computed based on a tax rate of 12.0%. This rate is an average, taking into account the tax rates applicable to income from Frutarom Ltd.’s preferred enterprises (in accordance with the amendment to the law, see also note 13c.2).

Deferred taxes of foreign subsidiaries not in Israel are computed at the tax rates applicable to these companies (see b above).

 

  e. Taxes on Income Included in The Income Statements for the Presented Periods:

 

  1) As follows:

 

     2017      2016      2015  
     U.S. dollars in thousands  

Current taxes:

        

For the reported year’s income

     42,521        34,815        24,836  

Adjustments in respect of previous years

     958        (1,816      (2,466
  

 

 

    

 

 

    

 

 

 
     43,479        32,999        22,370  

Deferred taxes:

        

Creation and reversal of deferred taxes

     (8,682      (7,653      (398
  

 

 

    

 

 

    

 

 

 

Total

     34,797        25,346        21,972  
  

 

 

    

 

 

    

 

 

 

Current taxes are computed in accordance with the statutory tax rates of Group entities around the world (see above) and in accordance with relevant tax benefits in each country.

 

F-62


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13—TAXES ON INCOME (continued):

 

  2) Following is a reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rates applicable to companies in Israel (Note 13c above) and the actual tax expense:

 

     2017      2016      2015  
     U.S. dollars in thousands  

Income before taxes on income, as reported in the income statements

     186,360        136,415        118,057  
  

 

 

    

 

 

    

 

 

 

Theoretical tax expense in respect of this income—at 24% (2016 – 25.0%; 2015 – 26.5%)

     44,726        34,104        31,285  

Less—tax benefit arising from approved enterprise/benefited enterprise status

     (1,459      (1,249      (1,698

Increase in taxes resulting from different tax rates applicable to foreign subsidiaries

     (1,946      (2,645      (3,667

Decrease in taxes arising from computation of deferred taxes at a rate different than theoretical rate

     (944      (2,114      (2,530

Increase (decrease) in deferred taxes as a result of future changes in the tax rates

     (4,272             (208

Increase (decrease) in taxes arising from permanent differences—disallowable expenses (income)

     (2,607      27        1,110  

Capital gains

     152                

Decrease in taxes resulting from utilization, in the reported year, of carry forward tax losses and other expenses for which deferred taxes were not created (net of increase in taxes in respect of tax losses incurred in the reported year for which deferred taxes were not created)

            (728      (50

Other

     191        (233      196  
  

 

 

    

 

 

    

 

 

 

Taxes on income for the reported year

     33,841        27,162        24,438  
  

 

 

    

 

 

    

 

 

 

 

  f. Tax Assessments

The Company and its Israeli subsidiaries have received final tax assessments through the 2009 tax year.

 

  g. Effect of adoption of IFRS in Israel on tax liability

As mentioned in Note 2a, the Group prepares its financial statements in accordance with IFRS.

As also indicated in the said note, IFRS id different from Generally Accepted Accounting Principles in Israel (Israeli GAAP) and accordingly, preparation of financial statements in accordance with IFRS may reflect a financial position, results of operations and cash flows that are materially different from the ones presented in financial statements presented in accordance with accounting principles generally accepted in Israel.

In accordance with the Law for the Amendment of the Income Tax Ordinance (No. 174—Temporary Provisions for Tax Years 2007, 2008 and 2009), 2010 that was passed in the Knesset on January 25, 2010 and published in the official gazette on February, 4, 2010 (hereafter—the amendment to the ordinance), Accounting Standard No. 29 that was issued by the Israel Accounting Standard Board would not be used for determining the taxable income for tax purposes in respect of tax years 2007-2011; this would be the case even if the said accounting standard was applied for the said tax years in the financial statements.

 

F-63


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13—TAXES ON INCOME (continued):

 

The meaning of the amendment to the ordinance is that IFRS would actually not be used in computation of the taxable income for the said tax years.

On October 31, 2011, the Government of Israel published a law memorandum in connection with the amendment to the Income Tax Ordinance (hereafter—the law memorandum) resulting from application of IFRS in the financial statements. The law memorandum adopts IFRS in principle. Nevertheless, the law memorandum suggests making several amendments to the Income Tax Ordinance, which will serve to clarify and determine the manner of computation of taxable income for tax purposes in cases where the manner of computation is not clear and IFRS do not correspond with the tax principles applied in Israel. At the same time, the law memorandum generally adopts IFRS. The legislation procedures relating to the law memorandum have not yet been completed and it is doubtful whether they will be completed in the near future.

Since the legislative proceedings relating to the law memorandum have not yet been completed, the Company estimates that the term of the temporary provision for 2007 to 2013 will be extended to 2014-2017 as well. Therefore, the Group’s management expects that, at this stage, the new legislation will not apply to tax years preceding 2018.

 

  h. US tax reform

On December 22, 2017, the President of the United States signed into law a legislation that overhauls the US tax system (“the reform”). The reform introduced significant changes to US tax law, including several provisions that are expected to have impact on the tax liability of the Company in the US.

The following are provisions in the reform that are relevant to the Company:

 

  a) US federal corporate tax rate was cut from 35% to 21%, effective January 1, 2018.

 

  b) Deduction of net operating losses is limited to 80% of taxable income.

 

  c) Interest expenses—According to the new legislation, in 2018 through 2021, interest expense deductions are capped at 30% of EBITDA. After 2021, companies will no longer be able to deduct interest expenses that are 30% of their EBIT. Any non-deductible amount can be carried forward based on the same mechanism and without time limit.

 

  d) Bonus depreciation—the reform includes a provision allowing companies to immediately write off expense of certain types of property acquired and placed in service between September 27, 2017 and January 1, 2028.

The impact on the financial statements of the Company as of December 31, 2017 and for the year then ended, as a result of the reform becoming effective, is as follows:

Deferred tax liabilities were reduced by $4,249 thousand due to the tax rate reduction, which was recognized against deferred tax income in profit or loss.

NOTE 14—LIABILITIES SECURED BY PLEDGES AND RESTRICTIONS PLACED IN RESPECT OF LIABILITIES:

 

  a. To secure short-term borrowings and long-term loans received by a US subsidiary, this subsidiary recorded a negative pledge on its assets. Additional obligation for negative pledge on its assets carried out by a subsidiary in Israel.

 

  b. To secure long-term loans and other services received by subsidiaries in Israel and the UK, the subsidiary in Israel and the subsidiary in the UK recorded a negative pledge on their assets.

 

F-64


FRUTAROM INDUSTRIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14—LIABILITIES SECURED BY PLEDGES AND RESTRICTIONS PLACED IN RESPECT OF LIABILITIES (continued):

 

  c. To secure long-term loans from financial institutions received by subsidiaries in Switzerland and Spain, these subsidiaries recorded a negative pledge on their assets.

 

  d. To secure a long-term loan extended by local and international banks and financial institutions, the Group has undertaken upon itself to meet the following financial covenants:

 

  1) The amount representing the Group’s equity would not be lower than $375 million at any given time. As of December 31, 2017, the Group’s equity was $879 million.

 

  2) The amount representing the Group’s equity would not be lower than 25% of total assets. As of December 31, 2017, the Company’s equity was 45% of total net assets.

 

  3) The ratio between total financial liabilities of the Group and its pre-tax pro-forma operating profit from operating activities plus depreciation and amortization may not exceed 4.0 as of December 31, 2017. As of December 31, 2017, the above ratio is 1.85.

 

  e. The Company has undertaken upon itself to meet restrictions regarding dividend distribution. The Company would be allowed to distribute dividends as follows:

 

  1) Up to 50% of the retained earnings accumulated through December 31, 2011; based on the retained earnings balance recorded in the Company’s balance sheet as of December 31, 2011.

 

  2) Up to 50% of the Company’s net income for each calendar year based on the net income information recorded in the Company’s income statement for the calendar year during which the said income was accumulated.

As mentioned above, as of December 31, 2017, the Group is in compliance with those covenants.

NOTE 15—INVESTMENTS IN ASSOCIATES:

 

  a. Composition:

 

     December 31 2017      December 31 2016  
     Cost      Company’s share of
earnings (losses) of
associates
     Total      Translation
gains and
losses
     Total      Total  
     U.S. dollars in thousands  

Associates

     76,879        265        77,144        397        77,541        27,976