Notes to Consolidated Financial Statements
Note 1. Consolidated Financial Statements:
Basis of Presentation
These interim statements and related management’s discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related notes and management’s discussion and analysis of results of operations, liquidity and capital resources included in our
2016
Annual Report on Form 10-K (“
2016
Form 10-K”). These interim statements are unaudited. The year-end balance sheet data included in this Form 10-Q was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. We have historically operated and continue to operate on a 52/53 week fiscal year ending on the Friday closest to the last day of the quarter. For ease of presentation, March 31 and December 31 are used consistently throughout this Form 10-Q and these interim financial statements and related notes to represent the period-end dates. For the
2017
and
2016
quarters, the actual closing dates were March 31, and April 1, respectively. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. When used herein, the terms “IFF,” the “Company,” “we,” “us” and “our” mean International Flavors & Fragrances Inc. and its consolidated subsidiaries.
Reclassifications and Revisions
Certain prior year amounts have been reclassified and revised to conform with current year presentation.
The Consolidated Statement of Comprehensive Income has been revised to properly reflect Gain on sales of fixed assets within Operating profit for the three months ending March 31, 2016. In addition, approximately
$5.4 million
of expense was recorded during the first quarter of 2017 for a tax assessment relating to prior periods. These adjustments were not material to the previously-issued financial statements.
Recent Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board (“FASB”) issued amendments to the Compensation - Retirement Benefits guidance which requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and postretirement costs in operating expenses. This guidance is effective, and should be applied retroactively, for fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period. The Company is currently evaluating the impact that this guidance will have on its Consolidated Statement of Comprehensive Income.
In January 2017, the FASB issued amendments to the Business Combination guidance which clarifies the definition of a business in order to assist companies when evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance will be effective prospectively for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact this guidance may have on its Consolidated financial statements and on accounting for future acquisitions.
In January 2017, the FASB issued an amendment to the Goodwill Impairment guidance which eliminates Step 2 from the goodwill impairment test. This guidance will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company plans to adopt this guidance in accordance with its existing annual impairment review policy in fiscal year 2017. The Company does not expect this adoption to have an impact on its consolidated financial statements.
In October 2016, the FASB issued authoritative guidance which allows for the immediate recognition of current and deferred income tax impact on intra-entity asset transfers, excluding inventory. This guidance will be effective for fiscal years beginning after December 15, 2017. The Company adopted this guidance in the first quarter of fiscal year 2017 and accordingly, recorded a cumulative-effect adjustment to Retained earnings that reduced Other assets and adjusted Deferred income taxes by a net amount of approximately
$33 million
.
In August 2016, the FASB issued authoritative guidance which requires changes to the classification of certain activities within the statement of cash flows. This guidance will be effective for annual and interim periods beginning after December 15, 2017. Early adoption will be permitted for all entities. The Company does not expect this adoption to have a significant impact on its statement of cash flows.
In March 2016, the FASB issued authoritative guidance which requires changes to several aspects of the accounting for share-based payment transactions, including the treatment of income tax consequences, classification of awards as either equity
or liabilities, and classification of certain items on the statement of cash flows. This guidance was effective for annual and interim periods beginning after December 15, 2016. The Company adopted this standard during the first quarter of 2017. The standard requires that employee taxes paid when an employer withholds shares be presented in the Consolidated Statement of Cash Flows as a financing activity instead of an operating activity. The Company adopted this change retrospectively, resulting in a
$3.0 million
and
$7.3 million
increase to Net cash provided by operating activities on the Consolidated Statement of Cash Flows as of March 31, 2017 and 2016, respectively. In addition, the standard requires that excess tax benefits presented in the Consolidated Statement of Cash Flows be classified as an operating activity instead of a financing activity. The Company adopted this change retrospectively, resulting in a
$0.8 million
and
$1.0 million
increase to Net cash provided by operating activities on the Consolidated Statement of Cash Flows as of March 31, 2017 and 2016, respectively.
The standard also requires all excess tax benefits/deficiencies be recognized as income tax expense/benefit in the Consolidated Statement of Comprehensive Income. This guidance has been applied prospectively. This change resulted in a
$0.8 million
benefit to income tax expense for the period ended March 31, 2017. The 2016 period included a
$4.5 million
benefit to equity, which has not been retrospectively adjusted. The full year 2016 benefit to equity was
$5.3 million
. Additionally, the standard allows the Company to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The Company has elected to continue to account for forfeitures using an estimate of awards expected to be forfeited.
In February 2016, the FASB issued authoritative guidance which requires changes to the accounting for leases. The new guidance establishes a new lease accounting model, that requires entities to record assets and liabilities related to leases on the balance sheet for certain types of leases. The guidance will be effective for annual and interim periods beginning after December 31, 2018. Early adoption will be permitted for all entities. The Company expects the adoption of this guidance will result in significant increases to assets and liabilities on its Consolidated Balance Sheet and is still evaluating the impact on its Consolidated Statement of Comprehensive Income.
In May 2014, the FASB issued authoritative guidance that provides for a comprehensive model to be used in accounting for revenue arising from contracts with customers. Under this standard, revenue will be recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. This guidance is applicable to all entities and is effective for annual and interim periods beginning after December 15, 2017. Adoption as of the original effective date is permitted. Accordingly, the Company is required to adopt this standard in the first quarter of fiscal year 2018. Companies have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Consolidated Balance Sheet. The Company is evaluating the impact of the new standard, including updates to the standard that were issued by the FASB. In particular, the Company has reviewed the nature of its larger customer relationships and is in the process of reviewing the nature of potential regional variations in all aspects of its customer base regardless of size. Based on the work performed to date, the Company expects to conduct further review and analysis of certain areas that may lead to changes in the manner in which the Company recognizes revenue, including the customized nature of the product, consignment arrangements, rebates, upfront costs, shipping terms and documentation other than formal contracts. As a result, the financial statement impact has not yet been determined. The Company is also currently evaluating the method of adoption and the potential impacts to the consolidated financial statements and related disclosures.
Accounts Receivable
The Company sells certain accounts receivable on a non-recourse basis to unrelated financial institutions under “factoring” agreements that are sponsored, solely and individually, by certain customers. The Company accounts for these transactions as sales of receivables, removes the receivables sold from its financial statements, and records cash proceeds when received by the Company. The beneficial impact on cash provided by operations from participating in these programs decreased approximately
$27.1 million
for the
three
months ended
March 31, 2017
compared to a decrease of approximately
$4.7 million
for the
three
months ended
March 31, 2016
. The cost of participating in these programs was immaterial to our results in all periods.
Currency Translation Adjustment Reclassification
During the first quarter of 2017, the Company recorded income of approximately
$12.2 million
related to a foreign currency exchange gain from the release of a currency translation adjustment upon the liquidation of a foreign entity in 2017. This amount was recorded to Other (income) expense, net.
Note 2. Net Income Per Share:
Net income per share is based on the weighted average number of shares outstanding. A reconciliation of the shares used in the computation of basic and diluted net income per share is as follows:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(SHARES IN THOUSANDS)
|
2017
|
|
2016
|
Basic
|
79,098
|
|
|
79,666
|
|
Assumed dilution under stock plans
|
311
|
|
|
389
|
|
Diluted
|
79,409
|
|
|
80,055
|
|
There were
no
stock options or stock-settled appreciation rights (“SSARs”) excluded from the computation of diluted net income per share for the
three
months ended
March 31, 2017
. An immaterial amount of SSARs were excluded from the
2016
period.
The Company has issued shares of purchased restricted common stock and purchase restricted common stock units (collectively “PRSUs”) which contain rights to nonforfeitable dividends while these shares are outstanding and thus are considered participating securities. Such securities are required to be included in the computation of basic and diluted earnings per share pursuant to the two-class method. The Company did not present the two-class method since the difference between basic and diluted net income per share for both unrestricted common shareholders and PRSU shareholders was less than
$0.01
per share for each period presented, and the number of PRSUs outstanding as of
March 31, 2017
and
2016
was immaterial. Net income allocated to such PRSUs was
$0.3 million
and
$0.6 million
for the
three months ended March 31, 2017
and
2016
, respectively.
Note 3. Acquisitions:
2017 Activity
PowderPure
On April 7, 2017, the Company completed the acquisition of
100%
of the outstanding shares of Columbia PhytoTechnology, LLC d/b/a PowderPure ("PowderPure"), a privately-held flavors company with facilities in North America. The acquisition will be accounted for under the purchase method. The Company paid approximately
$55 million
for this acquisition, which was funded from existing resources. Due to the limited time since closing and the fact that the purchase price allocation has not been completed, the Company has not yet calculated the actual amounts related to the assets and liabilities acquired in the PowderPure transaction. As a result, certain required disclosures have not been made. The purchase price allocation is expected to be completed by the fourth quarter of 2017.
No pro forma financial information for 2017 and 2016 is presented as the acquisition was not material to the consolidated financial statements.
Fragrance Resources
On January 17, 2017, the Company completed the acquisition of
100%
of the outstanding shares of Fragrance Resources, a privately-held fragrance company with facilities in Germany, North America, France, and China. The acquisition was accounted for under the purchase method. Fragrance Resources was acquired to strengthen the North American and German fragrances business. The Company paid approximately Euro
142.0 million
(approximately
$150.5 million
) including approximately Euro
11.5 million
(approximately
$12.4 million
) of cash acquired for this acquisition, which was funded from existing resources. The purchase price exceeded the preliminary fair value of existing net assets by approximately
$119.0 million
. The excess was allocated principally to identifiable intangible assets including approximately
$59.6 million
related to customer relationships, approximately
$6.1 million
related to proprietary technology and trade name and approximately
$76.3 million
of goodwill (which is not deductible for tax purposes) and approximately
$23.0 million
of net deferred tax liability. Goodwill is the excess of the purchase price over the fair value of net assets acquired. Goodwill represents synergies from the addition of Fragrance Resources to the Company's existing Fragrances business. The intangible assets are being amortized over the following estimated useful lives: trade name and proprietary technology, up to
5
years and customer relationships,
12
-
16
years. The purchase price allocation is preliminary pending the finalization of the values of intangible assets, principally customer relationships, finalization of working capital calculations and the determination of useful lives. The purchase price allocation is expected to be completed by the third quarter of 2017.
No pro forma financial information for 2017 and 2016 is presented as the acquisition was not material to the consolidated financial statements.
2016 Activity
David Michael
On October 7, 2016, the Company completed the acquisition of
100%
of the outstanding shares of David Michael & Company, Inc. ("David Michael"). The acquisition was accounted for under the purchase method. David Michael was acquired to strengthen the North American flavors business. The Company paid approximately
$242.0 million
(including
$5.1 million
of cash acquired) for this acquisition, which was funded from existing resources. The preliminary purchase price allocation was updated during the first quarter of 2017, resulting in a reduction in allocation of value to customer relationships. The related reduction in amortization expense was not material to the Consolidated Statement of Comprehensive Income. The purchase price exceeded the preliminary fair value of existing net assets by approximately
$168.7 million
. The excess was allocated principally to identifiable intangible assets including approximately
$50.0 million
related to customer relationships, approximately
$8.4 million
related to proprietary technology and trade name and approximately
$110.3 million
of goodwill (which is deductible for tax purposes). Goodwill is the excess of the purchase price over the fair value of net assets acquired. Goodwill represents synergies from the addition of David Michael to the Company's existing Flavors business. The intangible assets are being amortized over the following estimated useful lives: trade name and proprietary technology, up to
5
years and customer relationships,
18
-
20
years. The purchase price allocation is preliminary pending the finalization of certain procedures associated with purchase price, contractually required to be completed subsequent to December 31, 2016 as well as the finalization of the analysis associated with customer relationships and certain other assets. The purchase price allocation is expected to be completed by the second quarter of 2017.
No pro forma financial information for 2016 is presented as the impact of the acquisition was immaterial to the Consolidated Statement of Comprehensive Income.
Note 4. Restructuring and Other Charges, Net:
2017 Productivity Program
On February 15, 2017, the Company announced that it was adopting a multi-year productivity program designed to improve overall financial performance, provide flexibility to invest in growth opportunities and drive long-term value creation. In connection with this program, the Company expects to optimize its global footprint and simplify its organizational structures globally. In connection with this initiative, the Company expects to incur cumulative, pre-tax cash charges of between
$30
-
$35 million
, consisting primarily of
$21
-
$22 million
in personnel-related costs and an estimated
$9
-
$13 million
in facility-related costs, such as lease termination, and integration-related costs. In addition, the Company may incur up to
$5 million
of accelerated depreciation. The Company recorded
$10.1 million
of these charges related to personnel-related costs and lease termination costs in the first quarter of 2017, with the remainder of the personnel-related costs expected to be recognized by the end of 2017 and the other costs expected to be recognized over the following seven quarters. During 2017, the Company made payments of
$2.1 million
related to severance. The overall charges are split approximately evenly between Flavors and Fragrances. This initiative is expected to result in the reduction of approximately
370
members of the Company’s global workforce in various parts of the organization.
2015 Severance Charges
During 2015, the Company established a series of initiatives intended to streamline its management structure, simplify decision-making and accountability, better leverage and align its capabilities across the organization and improve efficiency of its global manufacturing and operations network. As a result, the Company recorded charges for severance and related costs pertaining to approximately
150
positions that have been affected. During
2017
, the Company made payments of
$0.2 million
related to severance. The total cost of the plan is expected to be approximately
$8.8 million
with the remaining charges relating principally to accelerated depreciation. The Company expects the plan to be fully completed by the second quarter of 2017.
Changes in employee-related restructuring liabilities during the
three
months ended
March 31, 2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Employee-Related Costs
|
|
Other
|
|
Total
|
Balance at December 31, 2016
|
$
|
3,277
|
|
|
$
|
—
|
|
|
$
|
3,277
|
|
Additional charges (reversals), net
|
9,688
|
|
|
454
|
|
|
10,142
|
|
Non-cash charges
|
—
|
|
|
(454
|
)
|
|
(454
|
)
|
Payments
|
(2,319
|
)
|
|
—
|
|
|
(2,319
|
)
|
Balance at March 31, 2017
|
$
|
10,646
|
|
|
$
|
—
|
|
|
$
|
10,646
|
|
Note 5. Goodwill and Other Intangible Assets, Net:
Goodwill
Movements in goodwill during
2017
were as follows:
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Goodwill
|
Balance at December 31, 2016
|
$
|
1,000,123
|
|
Acquisitions
|
76,287
|
|
Foreign exchange
|
5,773
|
|
Other
|
38,288
|
|
Balance at March 31, 2017
|
$
|
1,120,471
|
|
Other above principally represents the increase to Goodwill associated with the update of certain customer relationship assumptions in the preliminary purchase price allocation of David Michael, as disclosed in Note 3.
Other Intangible Assets
Other intangible assets, net consist of the following amounts:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(DOLLARS IN THOUSANDS)
|
2017
|
|
2016
|
Cost
|
|
|
|
Customer relationships
|
$
|
396,083
|
|
|
$
|
371,270
|
|
Trade names & patents
|
32,172
|
|
|
30,679
|
|
Technological know-how
|
125,058
|
|
|
119,544
|
|
Other
|
24,551
|
|
|
24,470
|
|
Total carrying value
|
577,864
|
|
|
545,963
|
|
Accumulated Amortization
|
|
|
|
Customer relationships
|
(87,398
|
)
|
|
(82,555
|
)
|
Trade names & patents
|
(12,840
|
)
|
|
(12,198
|
)
|
Technological know-how
|
(69,576
|
)
|
|
(68,292
|
)
|
Other
|
(17,838
|
)
|
|
(17,135
|
)
|
Total accumulated amortization
|
(187,652
|
)
|
|
(180,180
|
)
|
|
|
|
|
Other intangible assets, net
|
$
|
390,212
|
|
|
$
|
365,783
|
|
Amortization
Amortization expense was
$7.1 million
and
$6.1 million
for the
three months ended March 31, 2017
and
2016
, respectively. Annual amortization is expected to be
$31.9 million
for the full year
2017
,
$31.1 million
for the year
2018
,
$29.6 million
for the year
2019
,
$28.9 million
for the year
2020
,
$24.4 million
for the year
2021
and
$22.1 million
for the year
2022
.
Note 6. Borrowings:
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Rate
|
|
Maturities
|
|
March 31, 2017
|
|
December 31, 2016
|
Senior notes - 2007
(1)
|
6.40
|
%
|
|
2017-27
|
|
499,696
|
|
|
499,676
|
|
Senior notes - 2013
(1)
|
3.20
|
%
|
|
2023
|
|
298,162
|
|
|
297,986
|
|
Euro Senior notes - 2016
(1)
|
1.75
|
%
|
|
2024
|
|
530,364
|
|
|
512,764
|
|
Credit facility
|
1.13
|
%
|
|
2019
|
|
102,277
|
|
|
—
|
|
Commercial paper
|
1.14
|
%
|
|
2017
|
|
107,441
|
|
|
—
|
|
Bank overdrafts and other
|
|
|
|
|
13,284
|
|
|
13,599
|
|
Deferred realized gains on interest rate swaps
|
|
|
|
|
862
|
|
|
1,346
|
|
|
|
|
|
|
1,552,086
|
|
|
1,325,371
|
|
Less: Current portion of debt
|
|
|
|
|
(365,669
|
)
|
|
(258,516
|
)
|
|
|
|
|
|
$
|
1,186,417
|
|
|
$
|
1,066,855
|
|
(1)
Amount is net of unamortized discount and debt issuance costs.
Commercial Paper
Commercial paper issued by the Company generally has terms of
90
days or less. As of
March 31, 2017
, there was
$107.4 million
of commercial paper outstanding, which had a weighted average effective interest rate of
1.14%
. As of
March 31, 2017
, commercial paper maturities did not extend for more than
30
days. The revolving credit facility is used as a backstop for the Company's commercial paper program.
No
commercial paper was issued during the
three
months ended
March 31, 2016
.
Note 7. Income Taxes:
Uncertain Tax Positions
At
March 31, 2017
, the Company had
$22.2 million
of unrecognized tax benefits recorded in Other liabilities and
$4.6 million
in Other current liabilities. If these unrecognized tax benefits were recognized, the effective tax rate would be affected.
At
March 31, 2017
, the Company had accrued interest and penalties of
$1.7 million
classified in Other liabilities and
$0.3 million
in Other current liabilities.
As of
March 31, 2017
, the Company’s aggregate provisions for uncertain tax positions, including interest and penalties, was
$28.8 million
associated with various tax positions asserted in foreign jurisdictions, none of which is individually material.
The Company regularly repatriates a portion of current year earnings from select non–U.S. subsidiaries. No provision is made for additional taxes on undistributed earnings of subsidiary companies that are intended and planned to be indefinitely invested in such subsidiaries. We intend to, and have plans to, reinvest these earnings indefinitely in our foreign subsidiaries to fund local operations and/or capital projects.
The Company has ongoing income tax audits and legal proceedings which are at various stages of administrative or judicial review. In addition, the Company has open tax years with various taxing jurisdictions that range primarily from
2007
to
2016
. Based on currently available information, we do not believe the ultimate outcome of any of these tax audits and other tax positions related to open tax years, when finalized, will have a material impact on our financial position.
The Company also has other ongoing tax audits and legal proceedings that relate to indirect taxes, such as value-added taxes, sales and use taxes and property taxes, which are discussed in Note 13.
Effective Tax Rate
The effective tax rate for the
three months ended March 31, 2017
was
16.4%
compared with
23.4%
for the
three months ended March 31, 2016
. The quarter-over-quarter decrease was largely due to various discrete items (including the effect of accrual to return adjustments, certain non-taxable gains on foreign currency and the impact of adopting the new accounting guidance on the tax effect of stock compensation vesting), a more favorable mix of earnings and the impact of the global supply chain hub, offset by unfavorable repatriation costs as compared to the prior year.
Note 8. Stock Compensation Plans:
The Company has various plans under which its officers, senior management, other key employees and directors may be granted equity-based awards. Equity awards outstanding under the plans include PRSUs, restricted stock units ("RSUs"), stock options, SSARs and Long-Term Incentive Plan awards; liability-based awards outstanding under the plans are cash-settled RSUs.
Stock-based compensation expense and related tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2017
|
|
2016
|
Equity-based awards
|
$
|
5,819
|
|
|
$
|
5,930
|
|
Liability-based awards
|
1,753
|
|
|
593
|
|
Total stock-based compensation expense
|
7,572
|
|
|
6,523
|
|
Less: tax benefit
|
(2,213
|
)
|
|
(1,973
|
)
|
Total stock-based compensation expense, after tax
|
$
|
5,359
|
|
|
$
|
4,550
|
|
Note 9. Segment Information:
The Company is organized into
two
operating segments: Flavors and Fragrances. These segments align with the internal structure of the Company used to manage these businesses. Performance of these operating segments is evaluated based on segment profit which is defined as operating profit before Restructuring and other charges, net, Global expenses (as discussed below) and certain non-recurring items, Interest expense, Other income (expense), net and Taxes on income.
The Global expenses caption below represent corporate and headquarters-related expenses which include legal, finance, human resources, certain incentive compensation expenses and other R&D and administrative expenses that are not allocated to individual operating segments.
Reportable segment information is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2017
|
|
2016
|
Net sales:
|
|
|
|
Flavors
|
$
|
406,164
|
|
|
$
|
372,508
|
|
Fragrances
|
422,129
|
|
|
410,804
|
|
Consolidated
|
$
|
828,293
|
|
|
$
|
783,312
|
|
Segment profit:
|
|
|
|
Flavors
|
$
|
98,010
|
|
|
$
|
91,813
|
|
Fragrances
|
81,700
|
|
|
89,237
|
|
Global expenses
|
(16,200
|
)
|
|
(13,870
|
)
|
Restructuring and other charges, net
(1)
|
(10,143
|
)
|
|
(101
|
)
|
Acquisition-related costs
(2)
|
(8,788
|
)
|
|
(1,037
|
)
|
Operational improvement initiative costs
(3)
|
(621
|
)
|
|
(268
|
)
|
Legal (charges) credits
(4)
|
—
|
|
|
1,446
|
|
Gain on sales of assets
(5)
|
21
|
|
|
2,713
|
|
Tax assessment
(6)
|
(5,350
|
)
|
|
—
|
|
Integration-related costs
(7)
|
(1,192
|
)
|
|
—
|
|
Operating profit
|
137,437
|
|
|
169,933
|
|
Interest expense
|
(12,807
|
)
|
|
(12,478
|
)
|
Other income (expense)
|
13,857
|
|
|
(2,559
|
)
|
Income before taxes
|
$
|
138,487
|
|
|
$
|
154,896
|
|
|
|
(1)
|
In 2017, charges represent severance costs related to the 2017 Productivity Program. In 2016, charges relate to accelerated depreciation which were recorded in Cost of goods sold.
|
|
|
(2)
|
Represent transaction costs related to the acquisitions of David Michael, Fragrance Resources and PowderPure as well as the amortization of inventory "step-up" related to David Michael and Fragrance Resources in the 2017 period and expense related to the amortization of inventory "step-up" and additional transaction costs related to the acquisition of Lucas Meyer in the 2016 period.
|
|
|
(3)
|
Represent accelerated depreciation in Hangzhou, China in both the 2017 and 2016 periods.
|
|
|
(4)
|
Represents interest receivable from the Spanish government related to the Spanish capital tax case.
|
|
|
(5)
|
Represents gains on sale of assets in Latin America in the 2017 period and in Europe in the 2016 period.
|
|
|
(6)
|
Represents the reserve for a tax assessment related to commercial rent for prior periods.
|
|
|
(7)
|
Represents costs related to the integration of the David Michael and Fragrance Resources acquisitions in the 2017 period.
|
Net sales are attributed to individual regions based upon the destination of product delivery. Net sales related to the U.S. for the
three months ended March 31, 2017
and
2016
were
$227.6 million
and
$189.9 million
, respectively. Net sales attributed to all foreign countries in total for the
three months ended March 31, 2017
and
2016
were
$600.7 million
and
$593.4 million
, respectively. No country other than the U.S. had net sales in any period presented greater than
10%
of total consolidated net sales.
Note 10. Employee Benefits:
Pension and other defined contribution retirement plan expenses included the following components:
|
|
|
|
|
|
|
|
|
U.S. Plans
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2017
|
|
2016
|
Service cost for benefits earned
|
$
|
698
|
|
|
$
|
771
|
|
Interest cost on projected benefit obligation
|
4,560
|
|
|
6,007
|
|
Expected return on plan assets
|
(9,246
|
)
|
|
(8,069
|
)
|
Net amortization and deferrals
|
1,793
|
|
|
1,387
|
|
Net periodic benefit cost
|
(2,195
|
)
|
|
96
|
|
Defined contribution and other retirement plans
|
2,255
|
|
|
2,402
|
|
Total expense
|
$
|
60
|
|
|
$
|
2,498
|
|
|
|
|
|
Non-U.S. Plans
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2017
|
|
2016
|
Service cost for benefits earned
|
$
|
5,514
|
|
|
$
|
3,775
|
|
Interest cost on projected benefit obligation
|
3,848
|
|
|
6,366
|
|
Expected return on plan assets
|
(12,133
|
)
|
|
(11,949
|
)
|
Net amortization and deferrals
|
3,923
|
|
|
3,264
|
|
Net periodic benefit cost
|
1,152
|
|
|
1,456
|
|
Defined contribution and other retirement plans
|
1,297
|
|
|
1,707
|
|
Total expense
|
$
|
2,449
|
|
|
$
|
3,163
|
|
The Company expects to contribute a total of approximately
$10 million
to its U.S. pension plans during
2017
. During the
three
months ended
March 31, 2017
,
no
contributions were made to the qualified U.S. pension plans,
$24.2 million
of contributions were made to the non-U.S. pension plans and
$1.1 million
of benefit payments were made with respect to the Company's non-qualified U.S. pension plan.
As of January 1, 2017, the Company changed its approach for calculating the discount rate which is applied to the Consolidated Balance Sheet and Consolidated Statement of Comprehensive Income from a single weighted-average discount rate approach to a multiple discount rate approach. The impact of this change for the full year 2017 is estimated to be a reduction of approximately
$8 million
in pension expense.
Expense recognized for postretirement benefits other than pensions included the following components:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2017
|
|
2016
|
Service cost for benefits earned
|
$
|
221
|
|
|
$
|
215
|
|
Interest cost on projected benefit obligation
|
588
|
|
|
787
|
|
Net amortization and deferrals
|
(1,046
|
)
|
|
(1,355
|
)
|
Total postretirement benefit income
|
$
|
(237
|
)
|
|
$
|
(353
|
)
|
The Company expects to contribute approximately
$5 million
to its postretirement benefits other than pension plans during
2017
. In the
three
months ended
March 31, 2017
,
$1.2 million
of contributions were made.
Note 11. Financial Instruments:
Fair Value
Accounting guidance on fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:
|
|
•
|
Level 1–Quoted prices for
identical
instruments in active markets.
|
|
|
•
|
Level 2–Quoted prices for
similar
instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
|
•
|
Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
.
|
This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. We determine the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) using the LIBOR swap curve and forward interest and exchange rates at period end. Such instruments are classified as Level 2 based on the observability of significant inputs to the model. We do not have any instruments classified as Level 1 or Level 3, other than those included in pension asset trusts as discussed in Note 13 of our
2016
Form 10-K.
These valuations take into consideration our credit risk and our counterparties’ credit risk. The estimated change in the fair value of these instruments due to such changes in our own credit risk (or instrument-specific credit risk) was immaterial as of
March 31, 2017
.
The amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at
March 31, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
(DOLLARS IN THOUSANDS)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Cash and cash equivalents
(1)
|
$
|
300,067
|
|
|
$
|
300,067
|
|
|
$
|
323,992
|
|
|
$
|
323,992
|
|
Credit facilities and bank overdrafts
(2)
|
115,561
|
|
|
115,561
|
|
|
13,599
|
|
|
13,599
|
|
Commercial paper
(2)
|
107,441
|
|
|
107,441
|
|
|
—
|
|
|
—
|
|
Long-term debt:
(3)
|
|
|
|
|
|
|
|
Senior notes - 2007
|
499,696
|
|
|
554,211
|
|
|
499,676
|
|
|
556,222
|
|
Senior notes - 2013
|
298,162
|
|
|
304,278
|
|
|
297,986
|
|
|
302,376
|
|
Euro Senior notes - 2016
|
530,364
|
|
|
564,677
|
|
|
512,764
|
|
|
546,006
|
|
|
|
(1)
|
The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those instruments.
|
|
|
(2)
|
The carrying amount of our credit facilities, bank overdrafts and commercial paper approximates fair value as the interest rate is reset frequently based on current market rates as well as the short maturity of those instruments.
|
|
|
(3)
|
The fair value of our long-term debt was calculated using discounted cash flows applying current interest rates and current credit spreads based on our own credit risk.
|
Derivatives
The Company periodically enters into foreign currency forward contracts with the objective of reducing exposure to cash flow volatility associated with our intercompany loans, foreign currency receivables and payables, and anticipated purchases of certain raw materials used in operations. These contracts generally involve the exchange of one currency for a second currency at a future date, have maturities not exceeding
twelve months
and are with counterparties which are major international financial institutions.
During the
three
months ended
March 31, 2017
and the year ended
December 31, 2016
, the Company entered into several forward currency contracts which qualified as net investment hedges, in order to mitigate a portion of our net European investments from foreign currency risk. The effective portions of net investment hedges are recorded in Other comprehensive income (“OCI”) as a component of Foreign currency translation adjustments in the accompanying Consolidated Statement of Comprehensive Income. Realized gains (losses) are deferred in accumulated other comprehensive income ("AOCI") where they will remain until the net investments in our European subsidiaries are divested. The outstanding forward currency contracts have remaining maturities of approximately
one year
.
Six
of these forward currency contracts matured during the
three
months ended
March 31, 2017
.
Subsequent to the issuance of the Euro Senior Notes - 2016 during the first quarter of 2016, the Company designated the debt as a hedge of a portion of its net European investments. Accordingly, the change in the value of the debt that is attributable to foreign exchange movements is recorded in OCI as a component of Foreign currency translation adjustments in the accompanying Consolidated Statement of Comprehensive Income.
During the
three
months ended
March 31, 2017
and the year ended
December 31, 2016
, the Company entered into several forward currency contracts which qualified as cash flow hedges. The objective of these hedges is to protect against the currency risk associated with forecasted U.S. dollar (USD) denominated raw material purchases made by Euro (EUR) functional currency entities which result from changes in the EUR/USD exchange rate. The effective portions of cash flow hedges are recorded in OCI as a component of gains/(losses) on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income. Realized gains/(losses) in AOCI related to cash flow hedges of raw material purchases are recognized as a component of Cost of goods sold in the accompanying Consolidated Statement of Comprehensive Income in the same period as the related costs are recognized.
The Company has entered into interest rate swap agreements that effectively converted the fixed rate on a portion of our long-term borrowings to a variable short-term rate based on the LIBOR plus an interest markup. These swaps are designated as fair value hedges. Amounts recognized in Interest expense were immaterial for the
three
months ended
March 31, 2017
.
During the first quarter of 2016, the Company entered into and terminated
two
Euro interest rate swap agreements to hedge the anticipated issuance of fixed-rate debt. These swaps were designated as cash flow hedges. The effective portions of cash flow hedges are recorded in OCI as a component of Losses on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income. The Company incurred a loss of Euro
2.9 million
(
$3.2 million
) due to the termination of these swaps. The loss is being amortized as interest expense over the life of the Euro Senior Notes - 2016 as discussed in Note 6.
During the fourth quarter of 2016 and the first quarter of 2017, the Company entered into interest rate swap agreements to hedge the anticipated issuance of fixed-rate debt, which are designated as cash flow hedges. The fair value of the hedges was a gain of
$0.3 million
as of March 31, 2017. The effective portions of cash flow hedges are recorded in OCI as a component of Losses/gains on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income.
The following table shows the notional amount of the Company’s derivative instruments outstanding as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
March 31, 2017
|
|
December 31, 2016
|
Foreign currency contracts
|
$
|
514,043
|
|
|
$
|
527,500
|
|
Interest rate swaps
|
600,000
|
|
|
412,500
|
|
The following tables show the Company’s derivative instruments measured at fair value (Level 2 of the fair value hierarchy), as reflected in the Consolidated Balance Sheets as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
(DOLLARS IN THOUSANDS)
|
Fair Value of
Derivatives
Designated as
Hedging
Instruments
|
|
Fair Value of
Derivatives Not
Designated as
Hedging
Instruments
|
|
Total Fair
Value
|
Derivative assets
(a)
|
|
|
|
|
|
Foreign currency contracts
|
$
|
5,898
|
|
|
$
|
598
|
|
|
$
|
6,496
|
|
Interest rate swaps
|
300
|
|
|
—
|
|
|
300
|
|
|
$
|
6,198
|
|
|
$
|
598
|
|
|
$
|
6,796
|
|
Derivative liabilities
(b)
|
|
|
|
|
|
Foreign currency contracts
|
$
|
658
|
|
|
$
|
4,894
|
|
|
$
|
5,552
|
|
Interest rate swaps
|
373
|
|
|
—
|
|
|
373
|
|
|
$
|
1,031
|
|
|
$
|
4,894
|
|
|
$
|
5,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(DOLLARS IN THOUSANDS)
|
Fair Value of
Derivatives
Designated as
Hedging
Instruments
|
|
Fair Value of
Derivatives Not
Designated as
Hedging
Instruments
|
|
Total Fair
Value
|
Derivative assets
(a)
|
|
|
|
|
|
Foreign currency contracts
|
$
|
13,765
|
|
|
$
|
7,737
|
|
|
$
|
21,502
|
|
Interest rate swaps
|
335
|
|
|
—
|
|
|
335
|
|
|
$
|
14,100
|
|
|
$
|
7,737
|
|
|
$
|
21,837
|
|
Derivative liabilities
(b)
|
|
|
|
|
|
Foreign currency contracts
|
$
|
46
|
|
|
$
|
2,209
|
|
|
$
|
2,255
|
|
Interest rate swaps
|
725
|
|
|
—
|
|
|
725
|
|
|
$
|
771
|
|
|
$
|
2,209
|
|
|
$
|
2,980
|
|
|
|
(a)
|
Derivative assets are recorded to Prepaid expenses and other current assets in the Consolidated Balance Sheet.
|
|
|
(b)
|
Derivative liabilities are recorded as Other current liabilities in the Consolidated Balance Sheet.
|
The following table shows the effect of the Company’s derivative instruments which were not designated as hedging instruments in the Consolidated Statement of Comprehensive Income for the
three
months ended
March 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
Amount of Gain (Loss)
Recognized in Income on
Derivative
|
|
Location of Gain (Loss)
Recognized in Income
on Derivative
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
|
Foreign currency contracts
|
$
|
(10,127
|
)
|
|
$
|
(4,943
|
)
|
|
Other (income) expense, net
|
Most of these net gains (losses) offset any recognized gains (losses) arising from the revaluation of the related intercompany loans during the same respective periods.
The following table shows the effect of the Company’s derivative instruments designated as cash flow and net investment hedging instruments in the Consolidated Statements of Comprehensive Income for the
three
months ended
March 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain
Recognized in OCI on
Derivative (Effective
Portion)
|
|
Location of (Loss) Gain
Reclassified from AOCI into
Income (Effective Portion)
|
|
Amount of (Loss) Gain
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
|
|
Three Months Ended March 31,
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
Derivatives in Cash Flow Hedging Relationships:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
(2,948
|
)
|
|
$
|
(7,003
|
)
|
|
Cost of goods sold
|
|
$
|
458
|
|
|
$
|
2,616
|
|
Interest rate swaps
(1)
|
1,213
|
|
|
(3,175
|
)
|
|
Interest expense
|
|
(188
|
)
|
|
(86
|
)
|
Derivatives in Net Investment Hedging Relationships:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
(1,046
|
)
|
|
(2,404
|
)
|
|
N/A
|
|
—
|
|
|
—
|
|
Euro Senior notes - 2016
|
(11,409
|
)
|
|
—
|
|
|
N/A
|
|
—
|
|
|
—
|
|
Total
|
$
|
(14,190
|
)
|
|
$
|
(12,582
|
)
|
|
|
|
$
|
270
|
|
|
$
|
2,530
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest rate swaps were entered into as pre-issuance hedges.
No
ineffectiveness was experienced in the above noted cash flow or net investment hedges during the
three
months ended
March 31, 2017
and
2016
.
The Company expects that approximately
$6.1 million
(net of tax) of derivative gains included in AOCI at
March 31, 2017
, based on current market rates, will be reclassified into earnings within the next 12 months. The majority of this amount will vary due to fluctuations in foreign currency exchange rates.
Note 12. Accumulated Other Comprehensive Income (Loss):
The following tables present changes in the accumulated balances for each component of other comprehensive income, including current period other comprehensive income and reclassifications out of accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
(Losses) Gains on
Derivatives
Qualifying as
Hedges
|
|
Pension and
Postretirement
Liability
Adjustment
|
|
Total
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2016
|
$
|
(352,025
|
)
|
|
$
|
7,604
|
|
|
$
|
(335,674
|
)
|
|
$
|
(680,095
|
)
|
OCI before reclassifications
|
8,957
|
|
|
(1,481
|
)
|
|
—
|
|
|
7,476
|
|
Amounts reclassified from AOCI
|
(12,214
|
)
|
|
(270
|
)
|
|
3,635
|
|
|
(8,849
|
)
|
Net current period other comprehensive income (loss)
|
(3,257
|
)
|
|
(1,751
|
)
|
|
3,635
|
|
|
(1,373
|
)
|
Accumulated other comprehensive (loss) income, net of tax, as of March 31, 2017
|
$
|
(355,282
|
)
|
|
$
|
5,853
|
|
|
$
|
(332,039
|
)
|
|
$
|
(681,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
(Losses) Gains on
Derivatives
Qualifying as
Hedges
|
|
Pension and
Postretirement
Liability
Adjustment
|
|
Total
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2015
|
$
|
(297,499
|
)
|
|
$
|
9,401
|
|
|
$
|
(325,342
|
)
|
|
$
|
(613,440
|
)
|
OCI before reclassifications
|
14,078
|
|
|
(7,662
|
)
|
|
—
|
|
|
6,416
|
|
Amounts reclassified from AOCI
|
—
|
|
|
(2,530
|
)
|
|
2,555
|
|
|
25
|
|
Net current period other comprehensive income (loss)
|
14,078
|
|
|
(10,192
|
)
|
|
2,555
|
|
|
6,441
|
|
Accumulated other comprehensive (loss) income, net of tax, as of March 31, 2016
|
$
|
(283,421
|
)
|
|
$
|
(791
|
)
|
|
$
|
(322,787
|
)
|
|
$
|
(606,999
|
)
|
The following table provides details about reclassifications out of accumulated other comprehensive income to the Consolidated Statement of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Three Months Ended March 31, 2016
|
|
Affected Line Item in the
Consolidated Statement
of Comprehensive Income
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
(Losses) gains on derivatives qualifying as hedges
|
|
|
|
|
|
Foreign currency contracts
|
$
|
524
|
|
|
$
|
2,990
|
|
|
Cost of goods sold
|
Interest rate swaps
|
(188
|
)
|
|
(86
|
)
|
|
Interest expense
|
|
(66
|
)
|
|
(374
|
)
|
|
Provision for income taxes
|
|
$
|
270
|
|
|
$
|
2,530
|
|
|
Total, net of income taxes
|
(Losses) gains on pension and postretirement liability adjustments
|
|
|
|
|
|
Prior service cost
|
$
|
(1,753
|
)
|
|
$
|
1,864
|
|
|
(a)
|
Actuarial losses
|
(6,423
|
)
|
|
(5,160
|
)
|
|
(a)
|
|
4,541
|
|
|
741
|
|
|
Provision for income taxes
|
|
$
|
(3,635
|
)
|
|
$
|
(2,555
|
)
|
|
Total, net of income taxes
|
|
|
(a)
|
The amortization of prior service cost and actuarial loss is included in the computation of net periodic benefit cost. Refer to Note 14 of our
2016
Form 10-K for additional information regarding net periodic benefit cost.
|
Note 13. Commitments and Contingencies:
Guarantees and Letters of Credit
The Company has various bank guarantees and letters of credit which are available for use to support its ongoing business operations and to satisfy governmental requirements associated with pending litigation in various jurisdictions.
At
March 31, 2017
, we had total bank guarantees and standby letters of credit of approximately
$36.8 million
with various financial institutions. Included in the above aggregate amount is a total of
$16.7 million
in bank guarantees which the Company has posted for certain assessments in Brazil for other diverse income tax and indirect tax disputes related to fiscal years 1998-2011. There were no material amounts utilized under the standby letters of credit as of
March 31, 2017
.
In order to challenge the assessments in these cases in Brazil, the Company has been required to, and has separately pledged assets, principally property, plant and equipment, to cover assessments in the amount of approximately
$15.8 million
as of
March 31, 2017
.
Lines of Credit
The Company has various lines of credit which are available to support its ongoing business operations. At
March 31, 2017
, we had available lines of credit (in addition to the
$847.7 million
of capacity under the Credit Facility discussed in Note 9 of our
2016
Form 10-K) of approximately
$75.5 million
with various financial institutions. There were no significant amounts drawn down pursuant to these lines of credit as of
March 31, 2017
.
Litigation
The Company assesses contingencies related to litigation and/or other matters to determine the degree of probability and range of possible loss. A loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly sensitive and requires judgments about future events. On at least a quarterly basis, the Company reviews contingencies related to litigation to determine the adequacy of accruals. The amount of ultimate loss may differ from these estimates and further events may require the Company to increase or decrease the amounts it has accrued on any matter.
Periodically, we assess our insurance coverage for all known claims, where applicable, taking into account aggregate coverage by occurrence, limits of coverage, self-insured retentions and deductibles, historical claims experience and claims experience with our insurance carriers. The liabilities are recorded at management’s best estimate of the probable outcome of the lawsuits and claims, taking into consideration the facts and circumstances of the individual matters as well as past experience on similar matters. At each balance sheet date, the key issues that management assesses are whether it is probable that a loss as to asserted or unasserted claims has been incurred and if so, whether the amount of loss can be reasonably estimated. We record the expected liability with respect to claims in Other liabilities and expected recoveries from our insurance carriers in Other assets. We recognize a receivable when we believe that realization of the insurance receivable is probable under the terms of the insurance policies and our payment experience to date.
Environmental
Over the past
20
years, various federal and state authorities and private parties have claimed that we are a Potentially Responsible Party (“PRP”) as a generator of waste materials for alleged pollution at a number of waste sites operated by third parties located principally in New Jersey and have sought to recover costs incurred and to be incurred to clean up the sites.
We have been identified as a PRP at
eight
facilities operated by third parties at which investigation and/or remediation activities may be ongoing. We analyze our potential liability on at least a quarterly basis. We accrue for environmental liabilities when they are probable and estimable. We estimate our share of the total future cost for these sites to be less than
$5 million
.
While joint and several liability is authorized under federal and state environmental laws, we believe the amounts we have paid and anticipate paying in the future for clean-up costs and damages at all sites are not material and will not have a material adverse effect on our financial condition, results of operations or liquidity. This assessment is based upon, among other things, the involvement of other PRPs at most of the sites, the status of the proceedings, including various settlement agreements and consent decrees, and the extended time period over which payments will likely be made. There can be no assurance, however, that future events will not require us to materially increase the amounts we anticipate paying for clean-up costs and damages at these sites, and that such increased amounts will not have a material adverse effect on our financial condition, results of operations or cash flows.
China Facilities
Guangzhou Flavors plant
During 2015, the Company was notified by Chinese authorities of compliance issues pertaining to the emission of odors from several of its plants in China. As a result, the Company's Guangzhou Flavors plant in China was temporarily idled. The Company has made additional capital improvements in odor-abatement equipment at these plants to address these issues and is in the process of building a second Flavors plant in China, which is expected to begin operating in the first quarter of 2019.
During the fourth quarter of 2016, the Company was notified that certain governmental authorities have begun to evaluate a change in the zoning of the Guangzhou Flavors plant. The zoning, if changed, would prevent the Company from continuing to manufacture product at the existing plant. The ultimate outcome of any change that the governmental authorities may propose, the timing of such a change and the nature of any compensation arrangements that might be provided to the Company are uncertain.
The net book value of the existing plant was approximately
$68 million
as of
March 31, 2017
.
Zhejiang Ingredients plant
The Company has received a request from the Chinese government to relocate its Fragrance Ingredients plant in Zhejiang, China. The Company is in discussions with the government regarding the timing of the requested relocation and the amount and nature of government compensation to be provided to the Company. The Company expects to conclude discussions with the Government in 2017. The net book value of the current plant was approximately
$25 million
as of
March 31, 2017
. Depending upon the ultimate outcome of the discussions with the Chinese government, between
$0
-
25 million
of the remaining net book value may be subject to accelerated depreciation.
Total China Operations
The total carrying value of our
six
existing plants in China (
two
of which are currently under construction) was approximately
$138 million
as of
March 31, 2017
.
If the Company is required to close a plant, or operate one at significantly reduced production levels on a permanent basis, the Company may be required to record charges that could have a material impact on its consolidated financial results of operations, financial position and cash flows in future periods.
Other Contingencies
The Company has contingencies involving third parties (such as labor, contract, technology or product-related claims or litigation) as well as government-related items in various jurisdictions in which we operate pertaining to such items as value-added taxes, other indirect taxes, customs and duties and sales and use taxes. It is possible that cash flows or results of operations, in any period, could be materially affected by the unfavorable resolution of one or more of these contingencies.
The most significant government-related contingencies exist in Brazil. With regard to the Brazilian matters, we believe we have valid defenses for the underlying positions under dispute; however, in order to pursue these defenses, we are required to, and have provided, bank guarantees and pledged assets in the aggregate amount of
$32.5 million
. The Brazilian matters take an extended period of time to proceed through the judicial process and there are a limited number of rulings to date.
In March 2012, ZoomEssence, Inc. filed a complaint against the Company in the U.S. District Court for the District of New Jersey alleging trade secret misappropriation, breach of contract and unjust enrichment in connection with certain spray dry technology disclosed to the Company. ZoomEssence sought an injunction and monetary damages. ZoomEssence initially sought a temporary restraining order and preliminary injunction, but the Court denied these applications in an order entered on September 27, 2013, finding that ZoomEssence had not demonstrated a likelihood of success on the merits of its claims. On November 3, 2014, ZoomEssence amended its complaint against the Company to include allegations of breach of the duty of good faith and fair dealing, fraud in the inducement, and misappropriation of confidential and proprietary information. On November 13, 2014, the Company filed a counterclaim against ZoomEssence alleging trade secret misappropriation, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, misappropriation of confidential and proprietary information, common law unfair competition, tortious interference with contractual relations, and conversion. During the third quarter of 2016, the Court stayed the case and directed the parties to mediate. During the fourth quarter of 2016, the parties engaged in mediation and various settlement discussions which have not resulted in a resolution of the litigation to date. The discussions among the parties have continued through the first quarter of 2017. If the case is not settled, we expect that a trial on the merits of the case will occur during 2018. Based on expert assessment of potential exposure and the status of the settlement discussions, the Company recorded an additional reserve of
$50 million
during 2016.
The Company periodically incurs product liability claims based on product that is sold to customers that may be defective or otherwise not in accordance with the customer’s requirements. The Company has recently been made aware of a claim for
product that was recently subject to a product recall. In the first quarter of 2017, the Company recorded a total charge of approximately
$1.8 million
to reserve for all remaining inventory at its manufacturing site and to provide the appropriate sales allowance on sales of the product to the customer. While it is probable that the Company will incur additional losses related to this claim, the amount of the ultimate claim that will be paid is not currently estimable as the following information is not yet available: details as to the amount of product that will ultimately be returned and the customer’s direct manufacturing and other production costs; costs related to the customer’s recall efforts; costs to dispose of defective product; and, other claims that the customer may make. While it is not currently possible to estimate the amount of losses, such losses, when recorded will affect income from operations in future individual quarters. The Company does not believe that the ultimate settlement of the claim will have a material impact on its financial condition. Separately, the Company expects to pursue reimbursement of all or a portion of costs, once incurred, from insurance and or the supplier; however, the nature, timing and amount of any such reimbursement cannot be determined at this time.
The Company determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that either a loss is reasonably possible or a loss in excess of accrued amounts is reasonably possible and the amount of losses or range of losses is determinable. For all third party contingencies (including labor, contract, technology, tax, product-related claims and business litigation), the Company currently estimates that the aggregate range of reasonably possible estimable losses in excess of any accrued liabilities is
$0
to approximately
$28 million
. The estimates included in this amount are based on the Company’s analysis of currently available information and, as new information is obtained, these estimates may change. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the matters in question. Thus, the Company’s exposure and ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued or the range disclosed above.
We are also a party to other litigation arising in the ordinary course of our business. We do not expect the outcome of these cases, singly or in the aggregate, to have a material effect on our consolidated financial condition.