Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Company background
We are a leading innovator of sensorial experiences, co-creating unique products that consumers taste, smell, or feel in fine fragrances and cosmetics, detergents and household goods, and food and beverages. We take advantage of
our capabilities in consumer insights, research and product development (“R&D”), creative expertise and customer intimacy to
partner with our customers in developing innovative and differentiated offerings for consumers. We believe that this collaborative approach will generate market share gains for our
customers. We operate in two business segments, Flavors and Fragrances.
Flavors are the key building blocks that impart taste experiences in food and beverage products and, as such, play a significant role in determining consumer preference for the end products in which they are used. As a leading creator of flavors, we help our customers deliver on the promise of delicious and healthy foods and drinks that appeal to consumers. While we are a global leader, our flavors business is more regional in nature, with different formulas that reflect local taste preferences. Our flavors compounds are ultimately used by our customers in four end-use categories: (1) Savory, (2) Beverages, (3) Sweet and (4) Dairy.
We are a global leader in the creation of fragrance compounds that are integral elements in
the world’s finest perfumes and best-known consumer products, within fabric care, home care, personal wash, hair care and toiletries products. Our Fragrances business consists of Fragrance Compounds and Fragrance Ingredients. Our Fragrance Compounds are organized into two broad categories, (1) Fine Fragrances and (2) Consumer Fragrances. Consumer Fragrances consists of five end-use categories of products: (1) Fabric Care, (2) Home Care, (3) Personal Wash, (4) Hair Care and (5) Toiletries. Also included in the Fragrances business unit are Fragrance Ingredients, consisting of cosmetic active and functional ingredients. Fragrance Ingredients are used internally and sold to third parties, including customers and competitors, for use in preparation of compounds.
The flavors and fragrances market is part of a larger market which supplies a wide variety of ingredients and compounds used in consumer products. The broader market includes large multi-national companies and smaller regional and local participants that supply products such as seasonings, texturizers, spices, enzymes, certain food-related commodities, fortified products and cosmetic ingredients.
The global market for flavors and fragrances has expanded consistently, primarily as a result of an increase in demand for, as well as an increase in the variety of, consumer products containing flavors and fragrances.
In
2016
, the flavors, fragrances and cosmetic actives and functional ingredients market, in which we compete, was estimated by management to be approximately $20.0 billion and is forecasted to grow approximately 2-3% by 2020, primarily driven by expected growth in emerging markets; however the exact size of the global market is not available due to fragmentation of data. We, together with the other top three companies, are estimated to represent approximately two-thirds of the total estimated sales in the global flavors and fragrances sub-segment of the broader market.
Development of new flavors and fragrance compounds is driven by a variety of sources, including requests from our customers, who are in need of a specific flavor or fragrance for use in a new or modified consumer product, or as a result of internal initiatives stemming from our consumer insights program. Our product development team works in partnership with our scientists and researchers to optimize the consumer appeal of the flavor or fragrance. It then becomes a collaborative process between our researchers, our product development team and our customers to perfect the flavor or fragrance so that it is ready to be included in the final consumer product.
On April 7, 2017, we completed the acquisition of Columbia PhytoTechnology, LLC d/b/a PowderPure ("PowderPure"), a processor of all-natural food ingredients, for approximately
$55.0 million
. The purchase price was funded from existing resources including drawdown on our credit facility and proceeds from commercial paper. This acquisition was accounted for as a business combination and is not expected to have a material impact on the Consolidated Statement of Comprehensive Income for 2017.
On January 17, 2017, we completed the acquisition of Fragrance Resources, a creator of specialty fine fragrances, for approximately Euro
142.0 million
(approximately
$150.5 million
). The purchase price was funded from existing resources including drawdown on our credit facility and proceeds from commercial paper. The acquisition strengthened our fragrances market position in North America and Germany. This acquisition was accounted for as a business combination and is not expected to have a material impact on the Consolidated Statement of Comprehensive Income for 2017.
2017
Overview
Net sales during the
second
quarter of
2017
increased
6%
on a reported basis and
8%
on a currency neutral basis (which excludes the effects of changes in currency) versus the 2016 period, with the effect of acquisitions contributing approximately
6%
to both reported and currency neutral growth rates. Sales growth, excluding acquisitions, reflects new win performance (net of losses) partially offset by volume declines on existing business in both Flavors and Fragrances.
Exchange rate fluctuations had a
200
basis point (bps) unfavorable impact on net sales for the
second
quarter, due to the strengthening of the U.S. dollar. The effect of exchange rates can vary by business and region, depending upon the mix of sales by destination country as well as the relative percentage of local sales priced in U.S. dollars versus local currencies.
Gross margins decreased year-over-year to
44.4%
in the
second
quarter of
2017
from
46.1%
in the
2016
period, driven primarily by unfavorable price versus input costs and weaker sales mix which were only partially offset by cost savings and productivity initiatives and the impact of acquisitions. Included in the
second
quarter of
2017
were
$9.6 million
of acquisition-related amortization of inventory "step-up" costs, costs associated with product recalls, operational improvement initiative and integration-related costs compared to
$1.0 million
of operational improvement initiative and restructuring costs included in the
second
quarter of
2016
. Excluding these items, gross margin decreased
60
bps compared to the prior year period. The overall raw material cost base continues to be relatively stable, but upward trending. We believe that we will continue to see higher prices in
2017
on certain categories (such as vanilla and citrus) and to a lesser extent oil-based derivatives. We continue to seek improvements in our margins through operational performance, cost reduction efforts and mix enhancement.
FINANCIAL PERFORMANCE OVERVIEW
Sales
Reported sales in the
second
quarter of
2017
increased approximately
6%
. We continued to benefit from our diverse portfolio of end-use product categories and geographies and had currency neutral growth in three of our four regions and all four of our Flavors end-use product categories. Sales growth excluding acquisitions was driven by new win performance partially offset by volume declines on existing business in both Flavors and Fragrances. Flavors achieved reported sales growth of
9%
and currency neutral growth of
11%
, with the effect of acquisitions contributing approximately
7%
to both reported and currency neutral growth rates. Fragrances achieved reported sales growth of
4%
and currency neutral sales growth of
5%
, with the effect of acquisitions contributing approximately
4%
to both reported and currency neutral growth rates. Additionally, Fragrance Ingredients sales were up
7%
on a reported basis and
9%
on a currency neutral basis. Overall, our
second
quarter
2017
results reflected flat sales growth from emerging markets and 3% growth from developed markets which each represented 50% of total sales. From a geographic perspective, for the
second
quarter of
2017
, North America (NOAM), Europe, Africa and the Middle East (EAME) and Latin America (LA) all delivered sales growth, led by NOAM with
19%
. Greater Asia (GA) sales declined
3%
.
Operating profit
Operating profit decreased
$5.5 million
to
$159.1 million
(
18.9%
of sales) in the
2017
second
quarter compared to
$164.7 million
(
20.8%
of sales) in the comparable
2016
period. The
second
quarter of
2017
included
$12.7 million
of acquisition-related costs, costs associated with product recalls, legal charges, restructuring, integration-related and operational improvement initiative costs as well as gains on sales of fixed assets compared to
$1.0 million
of acquisition-related, restructuring and operational improvement initiative costs which were partially offset by gains on sales of fixed assets and a favorable legal settlement in the prior year period. Excluding these charges, adjusted operating profit was
$171.8 million
(
20.4%
of sales) for the
second
quarter of
2017
, an increase from
$165.7 million
(
20.9%
of sales) for the
second
quarter of
2016
. Foreign currency changes had a
2.5%
unfavorable impact on operating profit in the
2017
period compared to no impact on operating profit in the
2016
period versus the
2015
period.
Other (income) expense, net
Other (income) expense, net decreased
$2.0 million
to
$0.5 million
of income in the
second
quarter of
2017
compared to
$2.4 million
of income in the
second
quarter of
2016
. The year-over-year decrease was primarily driven by unfavorable year-over-year foreign exchange gains/(losses) in 2017.
Net income
Net income decreased by
$6.9 million
quarter-over-quarter to
$109.8 million
for the
second
quarter of
2017
, driven by the factors discussed above.
Cash flows
Cash flows from operations for the
six
months ended
June 30, 2017
were
$57.9 million
or
7.0%
of sales, compared to
$172.3 million
or
22.0%
of sales for the
six
months ended
June 30, 2016
. The decrease in cash flows from operations in
2017
was principally driven by payment of a litigation settlement of $56 million (as discussed in Note 13 to the Consolidated Financial Statements), lower net income and higher incentive compensation payments for the
2017
period as compared to the
2016
period.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Net sales
|
$
|
842,861
|
|
|
$
|
793,478
|
|
|
6
|
%
|
|
$
|
1,671,154
|
|
|
$
|
1,576,789
|
|
|
6
|
%
|
Cost of goods sold
|
468,272
|
|
|
427,837
|
|
|
9
|
%
|
|
931,899
|
|
|
850,940
|
|
|
10
|
%
|
Gross profit
|
374,589
|
|
|
365,641
|
|
|
|
|
739,255
|
|
|
725,849
|
|
|
|
Research and development (R&D) expenses
|
70,320
|
|
|
63,252
|
|
|
11
|
%
|
|
140,031
|
|
|
126,637
|
|
|
11
|
%
|
Selling and administrative (S&A) expenses
|
135,910
|
|
|
132,784
|
|
|
2
|
%
|
|
276,240
|
|
|
256,327
|
|
|
8
|
%
|
Amortization of acquisition-related intangibles
|
8,494
|
|
|
5,130
|
|
|
66
|
%
|
|
15,561
|
|
|
11,191
|
|
|
39
|
%
|
Restructuring and other charges, net
|
791
|
|
|
—
|
|
|
100
|
%
|
|
10,934
|
|
|
—
|
|
|
100
|
%
|
Gain on sales of fixed assets
|
(68
|
)
|
|
(197
|
)
|
|
(65
|
)%
|
|
(89
|
)
|
|
(2,910
|
)
|
|
(97
|
)%
|
Operating profit
|
159,142
|
|
|
164,672
|
|
|
|
|
296,578
|
|
|
334,604
|
|
|
|
Interest expense
|
17,556
|
|
|
15,060
|
|
|
17
|
%
|
|
30,363
|
|
|
27,539
|
|
|
10
|
%
|
Other (income) expense
|
(454
|
)
|
|
(2,438
|
)
|
|
(81
|
)%
|
|
(14,312
|
)
|
|
118
|
|
|
(12,229
|
)%
|
Income before taxes
|
142,040
|
|
|
152,050
|
|
|
|
|
280,527
|
|
|
306,947
|
|
|
|
Taxes on income
|
32,245
|
|
|
35,317
|
|
|
(9
|
)%
|
|
54,968
|
|
|
71,610
|
|
|
(23
|
)%
|
Net income
|
$
|
109,795
|
|
|
$
|
116,733
|
|
|
(6
|
)%
|
|
$
|
225,559
|
|
|
$
|
235,337
|
|
|
(4
|
)%
|
Diluted EPS
|
$
|
1.38
|
|
|
$
|
1.46
|
|
|
(5
|
)%
|
|
$
|
2.84
|
|
|
$
|
2.93
|
|
|
(3
|
)%
|
Gross margin
|
44.4
|
%
|
|
46.1
|
%
|
|
(170
|
)
|
|
44.2
|
%
|
|
46.0
|
%
|
|
(180
|
)
|
R&D as a percentage of sales
|
8.3
|
%
|
|
8.0
|
%
|
|
30
|
|
|
8.4
|
%
|
|
8.0
|
%
|
|
40
|
|
S&A as a percentage of sales
|
16.1
|
%
|
|
16.7
|
%
|
|
(60
|
)
|
|
16.5
|
%
|
|
16.3
|
%
|
|
20
|
|
Operating margin
|
18.9
|
%
|
|
20.8
|
%
|
|
(190
|
)
|
|
17.7
|
%
|
|
21.2
|
%
|
|
(350
|
)
|
Adjusted operating margin
(1)
|
20.4
|
%
|
|
20.9
|
%
|
|
(50
|
)
|
|
20.1
|
%
|
|
21.1
|
%
|
|
(100
|
)
|
Effective tax rate
|
22.7
|
%
|
|
23.2
|
%
|
|
(50
|
)
|
|
19.6
|
%
|
|
23.3
|
%
|
|
(370
|
)
|
Segment net sales
|
|
|
|
|
|
|
|
|
|
|
|
Flavors
|
$
|
414,323
|
|
|
$
|
379,504
|
|
|
9
|
%
|
|
$
|
820,487
|
|
|
$
|
752,012
|
|
|
9
|
%
|
Fragrances
|
428,538
|
|
|
413,974
|
|
|
4
|
%
|
|
850,667
|
|
|
824,777
|
|
|
3
|
%
|
Consolidated
|
$
|
842,861
|
|
|
$
|
793,478
|
|
|
|
|
$
|
1,671,154
|
|
|
$
|
1,576,789
|
|
|
|
|
|
(1)
|
Adjusted operating margin excludes
$12.7 million
consisting of acquisition-related costs, costs associated with product recalls, legal charges, restructuring, integration-related and operational improvement initiative costs as well as gains on sales of fixed assets for the
three months ended June 30, 2017
and excludes
$1.0 million
related to operational improvement initiative, acquisition-relation and restructuring costs which were partially offset by gains on sales of fixed assets and a favorable legal settlement for the
three months ended June 30, 2016
. For the
six
months ended
June 30, 2017
adjusted operating margin excludes
$38.7 million
consisting of acquisition-related costs, costs associated with product recalls, tax assessment, legal charges, restructuring, integration-related and operational improvement initiative costs as well as gains on sales of fixed assets and excludes a benefit of
$1.8 million
related to gains on sales of fixed assets and a favorable legal settlement, which were only partially offset by acquisition-related, operational improvement initiative and restructuring costs for the
six
months ended
June 30, 2016
. See "Non-GAAP Financial Measures" below.
|
Cost of goods sold includes the cost of materials and manufacturing expenses. R&D expenses relate to the development of new and improved products, technical product support and compliance with governmental regulations. S&A expenses include expenses necessary to support our commercial activities and administrative expenses supporting our overall operating activities.
SECOND
QUARTER
2017
IN COMPARISON TO
SECOND
QUARTER
2016
Sales
Sales for the
second
quarter of
2017
totaled
$842.9 million
, an increase of
6%
from the prior year quarter. On a currency neutral basis sales increased
8%
. Sales growth reflected new win performance partially offset by volume declines on existing business in both Flavors and Fragrances. On both a reported and currency neutral basis, acquisitions accounted for approximately
6%
of the net sales growth.
Flavors Business Unit
Flavors reported sales increased
9%
from the prior year period while currency neutral sales increased
11%
during the
second
quarter of
2017
compared to the
2016
period. Acquisitions accounted for approximately
7%
of the net sales growth on a reported basis and approximately
8%
on a currency neutral basis. Sales growth excluding acquisitions reflected new win performance which was partially offset by volume declines on existing business. Overall growth was primarily driven by low single-digit growth in all four Flavors end-use categories. The Flavors business delivered sales growth in NOAM, LA and EAME, led by NOAM, and experienced sales declines in GA. Sales in NOAM, which included the impact of acquisitions, were led by high single-digit growth in Savory. LA sales were led by double-digit gains in Savory and Sweet and high single-digit gains in Beverage. Sales in EAME were driven by high single-digit gains in Dairy and mid single-digit gains in Beverage and Sweet. GA sales declines were driven by mid to high single-digit declines in Sweet and Dairy.
Fragrances Business Unit
Fragrances sales increased
4%
on a reported basis and
5%
on a currency neutral basis for the
second
quarter of
2017
compared to the
second
quarter of
2016
. Acquisitions accounted for approximately
4%
of both reported and currency neutral sales growth. Excluding the effect of acquisitions, reported sales were flat reflecting new win performance offset by volume declines on existing business. Net sales reflected double-digit growth in Fine Fragrances and high single-digit growth in Fragrance Ingredients which were offset by double-digit declines in Hair Care and high single-digit declines in Toiletries.
Sales Performance by Region and Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change in Sales - Second Quarter 2017 vs. Second Quarter 2016
|
|
|
Fine Fragrances
|
|
Consumer Fragrances
|
|
Ingredients
|
|
Total Frag.
|
|
Flavors
|
|
Total
|
NOAM
|
Reported
|
12
|
%
|
|
7
|
%
|
|
2
|
%
|
|
7
|
%
|
|
30
|
%
|
|
19
|
%
|
EAME
|
Reported
|
15
|
%
|
|
4
|
%
|
|
8
|
%
|
|
8
|
%
|
|
2
|
%
|
|
6
|
%
|
|
Currency Neutral
(1)
|
19
|
%
|
|
8
|
%
|
|
11
|
%
|
|
12
|
%
|
|
9
|
%
|
|
11
|
%
|
LA
|
Reported
|
-5
|
%
|
|
-5
|
%
|
|
35
|
%
|
|
-2
|
%
|
|
13
|
%
|
|
3
|
%
|
|
Currency Neutral
(1)
|
-7
|
%
|
|
-6
|
%
|
|
34
|
%
|
|
-4
|
%
|
|
11
|
%
|
|
1
|
%
|
GA
|
Reported
|
23
|
%
|
|
-3
|
%
|
|
1
|
%
|
|
-2
|
%
|
|
-3
|
%
|
|
-3
|
%
|
|
Currency Neutral
(1)
|
25
|
%
|
|
-2
|
%
|
|
3
|
%
|
|
-1
|
%
|
|
-2
|
%
|
|
-1
|
%
|
Total
|
Reported
|
10
|
%
|
|
0
|
%
|
|
7
|
%
|
|
4
|
%
|
|
9
|
%
|
|
6
|
%
|
|
Currency Neutral
(1)
|
11
|
%
|
|
1
|
%
|
|
9
|
%
|
|
5
|
%
|
|
11
|
%
|
|
8
|
%
|
|
|
(1)
|
Currency neutral sales growth is calculated by translating prior year sales at the exchange rates for the corresponding
2017
period.
|
|
|
•
|
NOAM Flavors sales growth, which included the impact of acquisitions, primarily reflected low single-digit growth in all four end-use categories. Total Fragrances sales growth reflected double-digit gains in Fine Fragrances, mid to high single-digit gains in Fabric Care and Home Care and low single-digit gains in Fragrance Ingredients, which were only partially offset by double-digit declines in Hair Care.
|
|
|
•
|
EAME Flavors sales experienced high single-digit gains in Dairy and mid single-digit gains in Beverage and Sweet. Total Fragrances sales growth was driven mainly by double-digit growth in Fine Fragrances as well as high single-digit growth in Fragrance Ingredients and low single-digit growth in Fabric Care which more than offset double-digit declines in Toiletries and high single-digit declines in Hair Care.
|
|
|
•
|
LA Flavors sales growth was driven by double-digit gains in Savory and Sweet and high single-digit gains in Beverage. Total Fragrances sales declines reflected double-digit gains in Fragrance Ingredients, which were more than offset by double-digit declines in Personal Wash and Hair Care as well as high single-digit declines in Fine Fragrances and mid to low single-digit declines in Home Care and Fabric Care.
|
|
|
•
|
GA Flavors sales declines were driven by mid to high single-digit declines in Sweet and Dairy. Total Fragrances sales declines were principally driven by double-digit gains in Fine Fragrances and low single-digit gains in Fragrance Ingredients which were more than offset by double-digit declines in Personal Wash and Hair Care.
|
Cost of Goods Sold
Cost of goods sold, as a percentage of sales, increased
170
bps to
55.6%
in the
second
quarter of
2017
compared to
53.9%
in the
second
quarter of
2016
, principally driven by unfavorable price versus input costs and manufacturing performance which were only partially offset by cost savings and productivity initiatives and the impact of acquisitions. Included in cost of goods sold were
$9.6 million
of acquisition-related amortization of inventory "step-up" costs, costs associated with product recalls, operational improvement initiative and integration-related costs in
2017
compared to
$1.0 million
of acquisition-related amortization of inventory "step-up" costs, operational improvement initiative costs and restructuring costs in
2016
.
Research and Development (R&D) Expenses
Overall R&D expenses, as a percentage of sales, increased slightly compared to the prior year period to
8.3%
in the
second
quarter of
2017
versus
8.0%
in the
second
quarter of
2016
. This increase was primarily driven by costs associated with R&D of acquired entities.
Selling and Administrative (S&A) Expenses
S&A expenses increased
$3.1 million
to
$135.9 million
or
16.1%
, as a percentage of sales, in the
second
quarter of
2017
compared to
$132.8 million
or
16.7%
, as a percentage of sales, in the
second
quarter of
2016
. The
$3.1 million
increase was principally due to costs associated with S&A expenses of acquired entities and approximately
$2.2 million
of legal charges, acquisition-related and integration-related costs in
2017
. Excluding the
$2.2 million
included in
2017
and
$0.2 million
of acquisition-related costs which were only partially offset by credits related to adjustment of a legal reserve in
2016
, adjusted S&A expenses increased by
$1.1 million
and was
15.9%
of sales in
2017
compared to
16.7%
of sales in
2016
.
Restructuring and Other Charges
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.
During the
second
quarter of
2017
, the Company recorded
$3.1 million
of charges related to personnel-related costs and lease termination costs, 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 six quarters. During the
second
quarter of
2017
, the Company made payments of
$4.5 million
related to severance. The overall charges were split approximately evenly between Flavors and Fragrances. This initiative is expected to result in the reduction of approximately
370
members of the Company’s global workforce in various parts of the organization. Once fully implemented, the Company expects to realize annual run-rate savings of between $40 million and $45 million from this program by 2019.
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 were affected. During the
second
quarter of
2017
, the Company recorded a credit of
$2.3 million
related to the reversal of severance accruals that were determined to be no longer required. No further actions are expected related to these 2015 initiatives.
Amortization of Acquisition-Related Intangibles
Amortization expenses increased to
$8.5 million
in the
second
quarter of
2017
compared to
$5.1 million
in the
second
quarter of
2016
. The increase was principally driven by the acquisitions of Fragrance Resources and PowderPure in 2017 and David Michael during the second half of 2016.
Operating Results by Business Unit
We evaluate the performance of business units based on segment profit which is defined as operating profit before Restructuring and other charges, net, Global expenses (as discussed in Note 9 to the Consolidated Financial Statements) and certain non-recurring items, net, Interest expense, Other (expense) income, net and Taxes on income. See Note 9 to the Consolidated Financial Statements for the reconciliation to Income before taxes.
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
(DOLLARS IN THOUSANDS)
|
2017
|
|
2016
|
Segment profit:
|
|
|
|
Flavors
|
$
|
100,338
|
|
|
$
|
90,337
|
|
Fragrances
|
84,860
|
|
|
87,596
|
|
Global expenses
|
(13,398
|
)
|
|
(12,268
|
)
|
Restructuring and other charges, net
|
(791
|
)
|
|
(182
|
)
|
Acquisition and related costs
|
(6,278
|
)
|
|
(213
|
)
|
Operational improvement initiative costs
|
(445
|
)
|
|
(831
|
)
|
Legal (charges) credits
|
(1,000
|
)
|
|
36
|
|
Gain on sales of assets
|
68
|
|
|
197
|
|
Tax assessment
|
19
|
|
|
—
|
|
Integration-related costs
|
(731
|
)
|
|
—
|
|
FDA mandated product recall
|
(3,500
|
)
|
|
—
|
|
Operating profit
|
159,142
|
|
|
164,672
|
|
Profit margin:
|
|
|
|
Flavors
|
24.2
|
%
|
|
23.8
|
%
|
Fragrances
|
19.8
|
%
|
|
21.2
|
%
|
Consolidated
|
18.9
|
%
|
|
20.8
|
%
|
Flavors Segment Profit
Flavors segment profit increased to
$100.3 million
in the
second
quarter of
2017
, or
24.2%
as a percentage of sales, compared to
$90.3 million
, or
23.8%
as a percentage of sales, in the comparable
2016
period. The increase principally reflected favorable volume and costs savings and productivity initiatives which were only partially offset by unfavorable manufacturing variances and mix.
Fragrances Segment Profit
Fragrances segment profit decreased approximately
3.1%
to
$84.9 million
in the
second
quarter of
2017
, or
19.8%
as a percentage of sales, compared to
$87.6 million
, or
21.2%
as a percentage of sales, in the comparable
2016
period. The decrease in segment profit and profit margin was primarily due to unfavorable price versus input cost and the impact from acquisitions which was only partially offset by the cost savings and productivity initiatives.
Global Expenses
Global expenses represent corporate and headquarters-related expenses which include legal, finance, human resources and R&D and other administrative expenses that are not allocated to an individual business unit. In the
second
quarter of
2017
, Global expenses were
$13.4 million
compared to
$12.3 million
during the
second
quarter of
2016
. The increase was principally driven by lower benefits from our currency hedging program and higher incentive compensation expense.
Interest Expense
Interest expense increased to
$17.6 million
in the
second
quarter of
2017
compared to
$15.1 million
in the
2016
period reflecting the issuance of the Senior Notes - 2017. Average cost of debt was 4.1% for the
2017
period compared to 4.0% for the
2016
period.
Other (Income) Expense, Net
Other (income) expense, net decreased by approximately
$2.0 million
to
$0.5 million
of income in the
second
quarter of
2017
versus
$2.4 million
of income in the comparable
2016
period. The year-over-year decrease was primarily driven by unfavorable year-over-year foreign exchange gains/(losses) in 2017.
Income Taxes
The effective tax rate for the
three months ended June 30, 2017
was
22.7%
compared with
23.2%
for the
three months ended June 30, 2016
. The quarter-over-quarter decrease was largely due to 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. Excluding
$3.3 million
of benefits associated with the pre-tax acquisition-related costs, costs associated with product recalls, legal charges, restructuring, integration-related and operational improvement initiative costs as partially offset by the tax charge associated with gains on sales of fixed assets in the current quarter, the
second
quarter
2017
adjusted effective tax rate was
23.0%
, or
10
bps lower than the
second
quarter
2016
adjusted effective tax rate of
23.1%
. The
2016
adjusted effective tax rate excluded
$0.1 million
of tax benefit associated with restructuring and operational improvement initiative costs which were only partially offset by tax charges associated with acquisition related costs and gains on the sales of fixed assets and a favorable legal settlement.
As a result of the adoption of ASU 2016-09, as discussed in Note 1 to our Consolidated Financial Statements, current income tax expense now includes the tax benefit of equity award vestings of
$2.4 million
for the three months ended
June 30, 2017
.
FIRST
SIX
MONTHS
2017
IN COMPARISON TO FIRST
SIX
MONTHS
2016
Sales
Sales for the first
six
months of
2017
totaled
$1,671.2 million
, an increase of
6%
from the
2016
period. On a currency neutral basis sales increased
7%
. Sales growth reflected new win performance partially offset by volume declines on existing business in both Flavors and Fragrances and unfavorable pricing in Fragrances. On both a reported and currency neutral basis, acquisitions accounted for approximately
5%
of the net sales growth.
Flavors Business Unit
Flavors sales increased
9%
on a reported basis and increased
11%
on a currency neutral basis during the first
six
months of
2017
compared to the
2016
period. Acquisitions accounted for approximately
7%
of the net sales growth on both a reported and currency neutral basis. Sales growth excluding acquisitions reflected new win performance which was partially offset by volume declines on existing business. Overall growth was primarily driven by low to high single-digit growth in all four end-use categories. The Flavors business delivered sales growth in NOAM, LA and EAME, led by NOAM, and experienced declines in GA. Sales growth in NOAM, which included the impact of acquisitions, were led by double-digit growth in Savory and Dairy. LA sales growth was led by double-digit gains in Savory and Dairy and high single-digit gains in Sweet. Sales in EAME were driven by mid to high single-digit gains in Savory and Sweet. GA sales experienced mid single-digit gains in Beverage which were more than offset by high single-digit declines in Dairy and low single-digit declines in Sweet.
Fragrances Business Unit
Fragrances sales increased
3%
on a reported basis and
4%
on a currency neutral basis for the first
six
months of
2017
compared to the
2016
period. Acquisitions accounted for approximately
4%
of both reported and currency neutral sales growth. Excluding the effect of acquisitions, reported sales declines reflected new win performance which was more than offset by volume declines on existing business and unfavorable price versus input costs. Net sales reflected double-digit gains in Fine Fragrances, mid single-digit gains in Fragrance Ingredients and low single-digit growth in Fabric Care which were more than offset by double-digit declines in Hair Care and mid single-digit declines in Toiletries and Personal Wash.
Sales Performance by Region and Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change in Sales - First Six Months 2017 vs. First Six Months 2016
|
|
|
Fine Fragrances
|
|
Consumer Fragrances
|
|
Ingredients
|
|
Total Frag.
|
|
Flavors
|
|
Total
|
NOAM
|
Reported
|
10
|
%
|
|
6
|
%
|
|
-4
|
%
|
|
4
|
%
|
|
28
|
%
|
|
17
|
%
|
EAME
|
Reported
|
18
|
%
|
|
4
|
%
|
|
10
|
%
|
|
10
|
%
|
|
1
|
%
|
|
6
|
%
|
|
Currency Neutral
(1)
|
22
|
%
|
|
8
|
%
|
|
13
|
%
|
|
13
|
%
|
|
7
|
%
|
|
11
|
%
|
LA
|
Reported
|
-9
|
%
|
|
-7
|
%
|
|
25
|
%
|
|
-5
|
%
|
|
11
|
%
|
|
0
|
%
|
|
Currency Neutral
(1)
|
-14
|
%
|
|
-7
|
%
|
|
24
|
%
|
|
-7
|
%
|
|
8
|
%
|
|
-1
|
%
|
GA
|
Reported
|
18
|
%
|
|
0
|
%
|
|
-6
|
%
|
|
0
|
%
|
|
-1
|
%
|
|
0
|
%
|
|
Currency Neutral
(1)
|
20
|
%
|
|
1
|
%
|
|
-4
|
%
|
|
1
|
%
|
|
0
|
%
|
|
0
|
%
|
Total
|
Reported
|
10
|
%
|
|
1
|
%
|
|
4
|
%
|
|
3
|
%
|
|
9
|
%
|
|
6
|
%
|
|
Currency Neutral
(1)
|
11
|
%
|
|
2
|
%
|
|
5
|
%
|
|
4
|
%
|
|
11
|
%
|
|
7
|
%
|
|
|
(1)
|
Currency neutral sales growth is calculated by translating prior year sales at the exchange rates for the corresponding 2017 period.
|
|
|
•
|
NOAM Flavors sales growth, which included the impact of acquisitions, were led by double-digit growth in Savory and Dairy. Total Fragrances sales growth, which included the impact of acquisitions, reflected double-digit gains in Fine Fragrances and mid to high single-digit growth in Home Care and Fabric Care, which was partially offset by mid single-digit declines in Fragrance Ingredients.
|
|
|
•
|
EAME Flavors sales experienced mid to high single-digit gains in Savory and Sweet. Total Fragrances sales growth, which included the impact of acquisitions, was driven mainly by double-digit growth in Fine Fragrances and Fragrance Ingredients as well as mid single-digit growth in Home Care.
|
|
|
•
|
LA Flavors sales growth was driven by double-digit gains in Savory and Dairy and high single-digit gains in Sweet. Total Fragrances sales declines reflected double-digit gains in Fragrance Ingredients, which were more than offset by double-digit declines in Hair Care and Personal Wash and low to high single-digit declines in Fabric Care and Home Care.
|
|
|
•
|
GA Flavors sales declines were driven by mid single-digit gains in Beverage which were more than offset by high single-digit declines in Dairy and low single-digit declines in Sweet. Total Fragrances flat sales growth principally reflected double-digit gains in Fine Fragrances and low single-digit growth in Fabric Care which were offset by mid single-digit declines in Fragrance Ingredients, Hair Care and Personal Wash.
|
Cost of Goods Sold
Cost of goods sold, as a percentage of sales, increased
180
bps to
55.8%
in the first
six
months of
2017
compared to
54.0%
in the
2016
period, principally driven by unfavorable manufacturing performance and price versus input costs which were only partially offset by cost savings and productivity initiatives and the impact of acquisitions. Included in cost of goods sold were
$15.7 million
of acquisition-related amortization of inventory "step-up", costs associated with product recalls, operational improvement initiative and integration-related costs in
2017
compared to
$2.3 million
of acquisition-related amortization of inventory "step-up", operational improvement initiative and restructuring costs in
2016
.
Research and Development (R&D) Expenses
Overall R&D expenses, as a percentage of sales, increased compared to the prior year period to
8.4%
in the first
six
months of
2017
versus
8.0%
in the
2016
period. This increase was primarily driven by costs associated with R&D of acquired entities.
Selling and Administrative (S&A) Expenses
S&A expenses increased
$19.9 million
to
$276.2 million
or
16.5%
, as a percentage of sales, in the first
six
months of
2017
compared to
16.3%
in the
2016
period. The
$19.9 million
increase was principally due to costs associated with S&A expenses of acquired entities and approximately
$12.0 million
of expense related to a tax assessment from prior year, legal charges and acquisition-related and integration-related costs in
2017
. Excluding the
$12.0 million
included in
2017
and the benefit of
$1.1 million
of credits related to legal credits which were only partially offset by acquisition-related costs in
2016
, adjusted S&A expenses increased by
$6.8 million
and was
15.8%
of sales in
2017
compared to
16.3%
in
2016
.
Restructuring and Other Charges
2017 Productivity Program
During the first
six
months of
2017
, the Company recorded charges of
$13.2 million
related to personnel-related costs and lease termination costs and made payments of
$6.8 million
related to severance. The overall charges were split approximately evenly between Flavors and Fragrances. This initiative is expected to result in the reduction of approximately 370 members of the Company’s global workforce in various parts of the organization. Once fully implemented, the Company expects to realize annual run-rate savings of between $40 million and $45 million from this program by 2019.
2015 Severance Charges
During the first
six
months of
2017
, the Company made payments of
$0.2 million
related to severance and recorded a credit of
$2.3 million
related to the reversal of severance accruals that were determined to be no longer required. No further actions are expected related to these 2015 initiatives.
Amortization of Acquisition-Related Intangibles
Amortization expenses increased to
$15.6 million
in the first
six
months of
2017
compared to
$11.2 million
in the
2016
period. The increase was principally driven by the acquisitions of Fragrance Resources and PowderPure in
2017
and David Michael during the second half of
2016
.
Operating Results by Business Unit
We evaluate the performance of business units based on segment profit which is defined as operating profit before Restructuring and other charges, net, Global expenses (as discussed in Note 9 to the Consolidated Financial Statements) and certain non-recurring items, net, Interest expense, Other (expense) income, net and Taxes on income. See Note 9 to the Consolidated Financial Statements for the reconciliation to Income before taxes.
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(DOLLARS IN THOUSANDS)
|
2017
|
|
2016
|
Segment profit:
|
|
|
|
Flavors
|
$
|
198,346
|
|
|
$
|
182,151
|
|
Fragrances
|
166,557
|
|
|
176,833
|
|
Global expenses
|
(29,594
|
)
|
|
(26,141
|
)
|
Restructuring and other charges, net
|
(10,934
|
)
|
|
(283
|
)
|
Acquisition and related costs
|
(15,066
|
)
|
|
(1,249
|
)
|
Operational improvement initiative costs
|
(1,066
|
)
|
|
(1,099
|
)
|
Legal (charges) credits
|
(1,000
|
)
|
|
1,482
|
|
Gain on sales of assets
|
89
|
|
|
2,910
|
|
Tax assessment
|
(5,331
|
)
|
|
—
|
|
Integration-related costs
|
(1,923
|
)
|
|
—
|
|
FDA mandated product recall
|
(3,500
|
)
|
|
—
|
|
Operating profit
|
296,578
|
|
|
334,604
|
|
Profit margin:
|
|
|
|
Flavors
|
24.2
|
%
|
|
24.2
|
%
|
Fragrances
|
19.6
|
%
|
|
21.4
|
%
|
Consolidated
|
17.7
|
%
|
|
21.2
|
%
|
Flavors Segment Profit
Flavors segment profit increased to
$198.3 million
in the first six months of
2017
, or
24.2%
as a percentage of sales, compared to
$182.2 million
, or
24.2%
as a percentage of sales, in the comparable
2016
period. The increase in segment profit principally reflected favorable volume and costs savings and productivity initiatives which were only partially offset by unfavorable price versus input costs as well as a reserve for a product liability sales allowance.
Fragrances Segment Profit
Fragrances segment profit decreased to
$166.6 million
in the first
six
months of
2017
, or
19.6%
as a percentage of sales, compared to
$176.8 million
, or
21.4%
as a percentage of sales, in the comparable
2016
period. The decrease in segment profit and profit margin was primarily due to unfavorable price versus input cost and the impact of acquisitions which was only partially offset by the cost savings and productivity initiatives.
Global Expenses
Global expenses represent corporate and headquarters-related expenses which include legal, finance, human resources and R&D and other administrative expenses that are not allocated to an individual business unit. In the first
six
months of
2017
, Global expenses were
$29.6 million
compared to
$26.1 million
during the first
six
months of
2016
. The increase was principally driven by lower benefits from our currency hedging program and slightly higher incentive compensation expense.
Interest Expense
Interest expense increased to
$30.4 million
in the first
six
months of
2017
compared to
$27.5 million
in the
2016
period reflecting the issuance of the Senior Notes - 2017. Average cost of debt was 3.8% for the
2017
period compared to 3.9% for the
2016
period.
Other (Income) Expense, Net
Other (income) expense, net increased by approximately
$14.4 million
to
$14.3 million
of income in the first
six
months of
2017
versus
$0.1 million
of expense in the comparable
2016
period. The year-over-year increase was primarily driven by the release of a currency translation adjustment (CTA) of
$12.2 million
related to the liquidation of a foreign entity in 2017.
Income Taxes
The effective tax rate for the
six
months ended
June 30, 2017
was
19.6%
compared with
23.3%
for the
six
months ended
June 30, 2016
. The year-over-year decrease was primarily due to various items (including 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. Excluding
$11.8 million
of tax benefits associated with pre-tax restructuring, acquisition-related, product liability, integration-related and operational improvement initiative costs as well as a tax assessment which were only partially offset by the tax charge associated with gains on sales of fixed assets and the non-taxable gains on foreign currency in the first quarter, the first
six
months
2017
adjusted effective tax rate was
21.8%
, or
150
bps lower than the first
six
months
2016
adjusted effective tax rate of
23.3%
. The
2016
adjusted effective tax rate excluded
$0.5 million
of tax charges associated with gains on sales of fixed assets and a favorable legal settlement which were only partially offset by tax benefits related to the pre-tax acquisition-related, restructuring and operational improvement initiative costs.
As a result of the adoption of ASU 2016-09, as discussed in Note 1 to our Consolidated Financial Statements, current income tax expense now includes the tax benefit of equity award vestings of
$3.2 million
for the
six
months ended
June 30, 2017
. In recent years, the tax benefit on these vestings was $4.5 million, $9.9 million and $5.3 million in fiscal 2014, 2015 and 2016, respectively.
Liquidity and Capital Resources
Cash and Cash Equivalents
We had cash and cash equivalents of
$491.4 million
at
June 30, 2017
compared to
$324.0 million
at
December 31, 2016
, of which
$198.5 million
of the balance at
June 30, 2017
was held outside the United States. Cash balances held in foreign jurisdictions are, in most circumstances, available to be repatriated to the United States; however, they would be subject to United States federal income taxes, less applicable foreign tax credits. We have not provided U.S. income tax expense on substantially all of the accumulated undistributed earnings of our foreign subsidiaries because we have the ability and plan to reinvest these indefinitely.
Effective utilization of the cash generated by our international operations is a critical component of our tax strategy. Strategic dividend repatriation from foreign subsidiaries creates U.S. taxable income, which enables us to realize deferred tax assets. The Company regularly repatriates, in the form of dividends from its non-U.S. subsidiaries, a portion of its current year earnings to fund financial obligations in the U.S.
Cash Flows Provided By Operating Activities
Net cash from operating activities in the first
six
months of
2017
was
$57.9 million
compared to
$172.3 million
in the first
six
months of
2016
. The decrease in cash from operating activities for the first
six
months of
2017
compared to
2016
was principally driven by payment of a litigation settlement of
$56 million
(as discussed in Note 13 to the Consolidated Financial Statements), lower net income and higher incentive compensation payments for the
2017
period as compared to
2016
period.
Working capital (current assets less current liabilities) totaled
$1,132.7 million
at
June 30, 2017
, compared to
$710.7 million
at
December 31, 2016
reflecting higher cash balances as a result of proceeds from the Senior Notes - 2017. The Company sold certain accounts receivable on a non-recourse basis to unrelated financial institutions under “factoring” agreements that are sponsored, solely and individually, by certain customers. We believe that participating in the factoring programs strengthens our relationships with these customers and provides operational efficiencies. The beneficial impact on cash provided by operations from participating in these programs decreased approximately
$4.7 million
for the
six
months ended
June 30, 2017
compared to an increase of approximately
$17.7 million
for the
six
months ended
June 30, 2016
. The cost of participating in these programs was immaterial to our results in all periods.
Cash Flows Used In Investing Activities
Net investing activities during the first
six
months of
2017
used
$232.0 million
compared to
$40.2 million
in the prior year period. The increase in cash used in investing activities principally reflected the acquisition of Fragrance Resources and PowderPure in 2017 for approximately
$136.0 million
and
$54.7 million
(net of cash acquired), respectively. Additions to property, plant and equipment were
$46.2 million
during the first
six
months of
2017
compared to
$43.2 million
in the first
six
months of
2016
. We expect additions to property, plant and equipment will be approximately 4.5% - 5% of our sales (net of potential grants and other reimbursements from government authorities) in
2017
.
Cash Flows Provided By Financing Activities
Net financing activities in the first
six
months of
2017
increased to
$343.6 million
compared to
$235.4 million
of cash inflows in the first
six
months of
2016
, principally driven by higher proceeds from the revolving credit facility and the issuance of the Senior Notes - 2017 as well as lower share repurchases which were only partially offset by higher dividend payments in the
2017
period compared to the 2016 period, which included the issuance of the Euro Senior Notes - 2016.
At
June 30, 2017
, we had
$1,894.2 million
of debt outstanding compared to
$1,325.4 million
outstanding at
December 31, 2016
.
We paid dividends totaling
$101.2 million
in the
2017
period. We declared a cash dividend per share of $0.64 in the
second
quarter of
2017
that was paid on July 7, 2017 to all shareholders of record as of June 26, 2017. In August 2017, the Board of Directors approved an increase in our quarterly dividend for the third quarter of 2017 by 8%, to $0.69 per share.
In December 2012, the Board of Directors authorized a $250 million share repurchase program, which commenced in the first quarter of 2013. In August 2015, the Board of Directors approved an additional $250 million share repurchase authorization and extension through December 31, 2017. Based on the total remaining amount of
$56.1 million
available under the amended repurchase program, approximately
0.4 million
shares, or
0.5%
of shares outstanding (based on the market price and shares outstanding as of
June 30, 2017
) could be repurchased under the program as of
June 30, 2017
. During the three months ended
June 30, 2017
, we repurchased
114,930
shares on the open market at an aggregate cost of
$15.6 million
or an average of
$135.7
per share. During the
six
months ended
June 30, 2017
, we repurchased
427,219
shares on the open market at an aggregate cost of
$53.2 million
or an average of
$124.6
per share. The purchases will be made from time to time on the open market or through private transactions as market and business conditions warrant. Repurchased shares will be placed into treasury stock. The ultimate level of purchases will be a function of the daily purchase limits established in the pre-approved program according to the share price at that time.
Capital Resources
Operating cash flow provides the primary source of funds for capital investment needs, dividends paid to shareholders and debt repayments. We anticipate that cash flows from operations and availability under our existing credit facilities are sufficient to meet our investing and financing needs for at least the next eighteen months. We regularly assess our capital structure, including both current and long-term debt instruments, as compared to our cash generation and investment needs in order to provide ample flexibility and to optimize our leverage ratios. We believe our existing cash balances are sufficient to meet our debt service requirements.
We supplement short-term liquidity with access to capital markets, mainly through bank credit facilities and issuance of commercial paper. Commercial paper issued by the Company generally has terms of 90 days or less. The maximum commercial
paper borrowings outstanding during the first and second quarters of 2017 were approximately
$107.5 million
and
$50 million
, respectively. As of
June 30, 2017
, there was no commercial paper outstanding. The revolving credit facility is used as a backstop for the Company's commercial paper program. No commercial paper was issued during the
six
months ended
June 30, 2016
.
We expect to contribute a total of approximately
$2
-
$10 million
to our U.S. pension plans during
2017
. During the
six
months ended
June 30, 2017
, no contributions were made to our qualified U.S. pension plans and
$29.3 million
contributions were made to our non-U.S. pension plans.
On May 18, 2017, the Company issued
$500.0 million
face amount of 4.375% Senior Notes ("Senior Notes - 2017") due 2047 at a discount of $
1.8 million
. The Company received proceeds related to the issuance of these Senior Notes - 2017 of
$493.9 million
which was net of the
$1.8 million
discount and
$4.4 million
in underwriting fees (recorded as deferred financing costs). In addition, the Company incurred
$0.9 million
in legal and professional costs associated with the issuance and such costs were recorded as deferred financing costs. In connection with the debt issuance, the Company entered into pre-issuance hedging transactions that were settled upon issuance of the debt and resulted in a loss of approximately
$5.3 million
. The discount, deferred financing costs and pre-issuance hedge loss are being amortized as interest expense over the 30 year term of the debt. The Senior Notes - 2017 bear interest at a rate of 4.375% per annum, with interest payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2017. The Senior Notes - 2017 will mature on June 1, 2047.
As of
June 30, 2017
, we had
$28.4 million
of borrowings under our revolving credit facility. The amount which we are able to draw down on under the facility is limited by financial covenants as described in more detail below. Our draw down capacity on the facility was
$921.6 million
at
June 30, 2017
. We expect interest expense to increase in the third quarter of 2017 as a result of a full quarter of interest related to the Senior Notes - 2017.
Under our revolving credit facility, we are required to maintain, at the end of each fiscal quarter, a ratio of net debt for borrowed money to adjusted EBITDA in respect of the previous 12-month period of not more than 3.5 to 1. Based on this ratio, at
June 30, 2017
our covenant compliance provided overall borrowing capacity of
$1,279 million
.
At
June 30, 2017
, we were in compliance with all financial and other covenants, including the net debt to adjusted EBITDA ratio. At
June 30, 2017
our Net Debt/adjusted EBITDA
(1)
ratio, as defined by the debt agreements, was
1.83
to 1, well below the financial covenants of existing outstanding debt. Failure to comply with the financial and other covenants under our debt agreements would constitute default and would allow the lenders to accelerate the maturity of all indebtedness under the related agreement. If such acceleration were to occur, we would not have sufficient liquidity available to repay the indebtedness. We would likely have to seek amendments under the agreements for relief from the financial covenants or repay the debt with proceeds from the issuance of new debt or equity, and/or asset sales, if necessary. We may be unable to amend the agreements or raise sufficient capital to repay such obligations in the event the maturities are accelerated.
|
|
(1)
|
Adjusted EBITDA and Net Debt, which are non-GAAP measures used for these covenants, are calculated in accordance with the definition in the debt agreements. In this context, these measures are used solely to provide information on the extent to which we are in compliance with debt covenants and may not be comparable to adjusted EBITDA and Net Debt used by other companies. Reconciliations of adjusted EBITDA to net income and net debt to total debt are as follows:
|
|
|
|
|
|
|
Twelve Months Ended June 30,
|
(DOLLARS IN MILLIONS)
|
2017
|
Net income
|
$
|
395.3
|
|
Interest expense
|
55.8
|
|
Income taxes
|
102.0
|
|
Depreciation and amortization
|
108.3
|
|
Specified items
(1)
|
89.0
|
|
Non-cash items
(2)
|
15.8
|
|
Adjusted EBITDA
|
$
|
766.2
|
|
|
|
(1)
|
Specified items for the 12 months ended
June 30, 2017
of
$89.0 million
consist of legal charges/credits, acquisition-related costs, costs associated with product recalls, operational improvement initiative costs, restructuring and other charges, gains on sales of fixed assets, integration-related costs, tax assessment and CTA realization.
|
|
|
(2)
|
Non-cash items represent all other adjustments to reconcile net income to net cash provided by operations as presented on the Statement of Cash Flows, including gain on disposal of assets and stock-based compensation.
|
|
|
|
|
|
|
June 30,
|
(DOLLARS IN MILLIONS)
|
2017
|
Total debt
|
$
|
1,894.2
|
|
Adjustments:
|
|
Deferred gain on interest rate swaps
|
(0.4
|
)
|
Cash and cash equivalents
|
(491.4
|
)
|
Net debt
|
$
|
1,402.4
|
|
As discussed in Note 13 to the Consolidated Financial Statements, at
June 30, 2017
, we had entered into various guarantees and had undrawn outstanding letters of credit from financial institutions. These arrangements reflect ongoing business operations, including commercial commitments, and governmental requirements associated with audits or litigation that are in process with various jurisdictions. Based on the current facts and circumstances they are not reasonably likely to have a material impact on our consolidated financial condition, results of operations, or cash flows.
Cautionary Statement Under the Private Securities Litigation Reform Act of 1995
This Quarterly Report includes “forward-looking statements” under the Federal Private Securities Litigation Reform Act of 1995, including statements regarding (i) expected raw material costs in
2017
, (ii) the expected impact of operational improvements, cost reduction efforts and mix enhancements on margins, (iii) the expected impact of the multi-year productivity program announced in 2017, (iv) cash flows to fund future operations and to meet debt service requirements, and (v) our plans and intentions to indefinitely reinvest undistributed foreign earnings in our foreign subsidiaries to fund local operations and/or capital projects. These forward-looking statements should be evaluated with consideration given to the many risks and uncertainties inherent in our business that could cause actual results and events to differ materially from those in the forward-looking statements. Certain of such forward-looking information may be identified by such terms as “will,” “expect,” “anticipate,” “believe,” “outlook,” “may,” “estimate,” “should,” “intend,” “plan” and “predict” similar terms or variations thereof. Such forward-looking statements are based on a series of expectations, assumptions, estimates and projections about the Company, are not guarantees of future results or performance, and involve significant risks, uncertainties and other factors, including assumptions and projections, for all forward periods. Our actual results may differ materially from any future results expressed or implied by such forward-looking statements. Such factors include, among others, the following:
|
|
•
|
macroeconomic trends affecting the emerging markets;
|
|
|
•
|
our ability to implement and adapt our Vision 2020 strategy;
|
|
|
•
|
our ability to successfully identify and complete acquisitions in line with our Vision 2020 strategy, and to realize the anticipated benefits of those acquisitions;
|
|
|
•
|
our ability to effectively compete in our market, and to successfully develop new and competitive products that appeal to our customers and consumers;
|
|
|
•
|
changes in consumer preferences and demand for our products or a decline in consumer confidence and spending;
|
|
|
•
|
our ability to benefit from our investments and expansion in emerging markets;
|
|
|
•
|
the impact of currency fluctuations or devaluations in the principal foreign markets in which we operate, including the devaluation of the Euro;
|
|
|
•
|
the impact of customer claims or product recalls;
|
|
|
•
|
the potential adverse impact of Brexit on currency exchange rates, global economic conditions and cross-border agreements that affect our business;
|
|
|
•
|
the economic and political risks associated with our international operations, including challenging economic conditions in China and Latin America;
|
|
|
•
|
the impact of any failure of our key information technology systems or costs that could be incurred due to a breach of data privacy or information security;
|
|
|
•
|
our ability to attract and retain talented employees;
|
|
|
•
|
our ability to comply with, and the costs associated with compliance, with U.S. and foreign environmental protection laws;
|
|
|
•
|
our ability to realize expected cost savings and efficiencies from our profitability improvement initiatives and other optimization activities;
|
|
|
•
|
volatility and increases in the price of raw materials, energy and transportation;
|
|
|
•
|
fluctuations in the quality and availability of raw materials;
|
|
|
•
|
the impact of a disruption in our supply chain or our relationship with our suppliers;
|
|
|
•
|
any adverse impact on the availability, effectiveness and cost of our hedging and risk management strategies;
|
|
|
•
|
our ability to successfully manage our working capital and inventory balances;
|
|
|
•
|
uncertainties regarding the outcome of, or funding requirements, related to litigation or settlement of pending litigation, uncertain tax positions or other contingencies;
|
|
|
•
|
the effect of legal and regulatory proceedings, as well as restrictions imposed on us, our operations, or our representatives by U.S. and foreign governments;
|
|
|
•
|
adverse changes in federal, state, local and international tax legislation or policies, including with respect to transfer pricing and state aid, and adverse results of tax audits, assessments, or disputes; and
|
|
|
•
|
changes in market conditions or governmental regulations relating to our pension and postretirement obligations.
|
New risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risks on our business. Accordingly, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Any public statements or disclosures by the Company following this report that modify or impact any of the forward-looking statements contained in or accompanying this report will be deemed to modify or supersede such outlook or other forward-looking statements in or accompanying this report.
The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the Company (such as in our other filings with the SEC or in company press releases) for other factors that may cause actual results to differ materially from those projected by the Company. Please refer to Part I. Item 1A., Risk Factors, of the
2016
Form 10-K for additional information regarding factors that could affect our results of operations, financial condition and cash flow.
Non-GAAP Financial Measures
The Company uses non-GAAP financial operating measures in this Quarterly Report, including: (i) currency neutral sales (which eliminates the effects that result from translating its international sales in U.S. dollars), (ii) adjusted gross margin (which excludes operational improvement initiative costs, acquisition-related costs, costs associated with product recalls and integration-related costs), (iii) adjusted operating profit and adjusted operating margin (which excludes legal charges/credits, acquisition-related costs, costs associated with product recalls, operational improvement initiative costs, restructuring and other charges, gains on sales of fixed assets, integration-related costs and tax assessments), (iv) adjusted selling and administrative expenses (which excludes acquisition-related costs, tax assessments, integration-related costs and legal charges/credits) and (v) adjusted effective tax rate (which excludes legal charges/credits, acquisition-related costs, costs associated with product recalls, operational improvement initiative costs, restructuring and other charges, gains on sales of fixed assets, integration-related costs, tax assessment and CTA realization). The Company also provides the non-GAAP measures adjusted EBITDA (which excludes certain specified items and non-cash items as set forth in the Company’s debt agreements) and net debt (which is adjusted for deferred gain on interest rate swaps and cash and cash equivalents) solely for the purpose of providing information on the extent to which the Company is in compliance with debt covenants contained in its debt agreements.
We provide these metrics because they are used by management as one means by which we assess our financial and operational performance and are also frequently used by analysts, investors and other interested parties in providing period to period comparisons of our operational performance. In addition, we believe that these measures, when used as supplements to GAAP measures of performance, are helpful to management and investors in evaluating the effectiveness of our business strategies and to compare our performance relative to our peers. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. Currency neutral sales, adjusted gross margin, adjusted operating profit, adjusted operating margin, adjusted selling and administrative expenses and adjusted effective tax rate should not be considered in isolation or as substitutes for analysis of our results under GAAP and may not be comparable to other companies’ calculation of such metrics.
A. Reconciliation of Non-GAAP Metrics
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Gross Profit
|
|
Reported (GAAP)
|
Operational Improvement Initiative Costs (a)
|
Acquisition and Related Costs (b)
|
Integration related costs (c)
|
FDA mandated product recall (h)
|
Adjusted (Non-GAAP)
|
Gross profit
|
$
|
374,589
|
|
445
|
|
5,606
|
|
98
|
|
3,500
|
|
$
|
384,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Selling and Administrative Expenses
|
|
Reported (GAAP)
|
Acquisition and Related Costs (b)
|
Integration related costs (c)
|
Legal Charges/Credits (d)
|
Tax Assessment (e)
|
Adjusted (Non-GAAP)
|
Selling and administrative expenses
|
$
|
135,910
|
|
(672
|
)
|
(542
|
)
|
(1,000
|
)
|
19
|
|
$
|
133,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Operating Profit
|
|
Reported (GAAP)
|
Operational Improvement Initiative Costs (a)
|
Acquisition Related Costs (b)
|
Integration related costs (c)
|
Legal Charges/Credits (d)
|
Tax Assessment (e)
|
Restructuring and Other Charges (f)
|
Gain on Sale of Asset (g)
|
FDA mandated product recall (h)
|
Adjusted (Non-GAAP)
|
Operating profit
|
$
|
159,142
|
|
445
|
|
6,278
|
|
731
|
|
1,000
|
|
(19
|
)
|
791
|
|
(68
|
)
|
3,500
|
|
$
|
171,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Net Income
|
|
Reported (GAAP)
|
Operational Improvement Initiative Costs (a)
|
Acquisition Related Costs (b)
|
Integration related costs (c)
|
Legal Charges/Credits (d)
|
Tax Assessment (e)
|
Restructuring and Other Charges (f)
|
Gain on Sale of Asset (g)
|
FDA mandated product recall (h)
|
Adjusted (Non-GAAP)
|
Income before taxes
|
$
|
142,040
|
|
445
|
|
6,278
|
|
731
|
|
1,000
|
|
(19
|
)
|
791
|
|
(68
|
)
|
3,500
|
|
$
|
154,698
|
|
Taxes on income (i)
|
$
|
32,245
|
|
111
|
|
1,472
|
|
243
|
|
354
|
|
(7
|
)
|
(75
|
)
|
(22
|
)
|
1,238
|
|
$
|
35,559
|
|
Net income
|
$
|
109,795
|
|
334
|
|
4,806
|
|
488
|
|
646
|
|
(12
|
)
|
866
|
|
(46
|
)
|
2,262
|
|
$
|
119,139
|
|
____________________
(a) Represents accelerated depreciation and idle labor costs in Hangzhou, China.
(b) Represents the amortization of inventory "step-up" related to the acquisitions of David Michael, Fragrance Resources and PowderPure, included in Cost of goods sold and transaction costs related to the acquisitions of Fragrance Resources and PowderPure, included in Selling and administrative expenses.
(c) Represents costs related to the integration of the David Michael and Fragrance Resources acquisitions.
(d) Represents additional charge related to litigation settlement.
(e) Represents the reversal of a portion of the reserve for payment of a tax assessment related to commercial rent for prior periods.
(f) Represents severance costs related to the 2017 Productivity Program which were partially offset by the reversal of 2015 severance charges that were no longer needed.
(g) Represents gains on sale of assets.
(h) Represents an estimate of the Company's incremental direct costs and customer reimbursement obligations, in excess of the Company's sales value of the recalled products, arising from an FDA mandated recall of consumer products as a result of raw material received and identified by the Company as containing contamination. (As discussed in Note 13 of the Consolidated Financial Statements, the sales value of the recalled products was reserved in the first quarter of 2017). While the Company does not believe that any of the affected raw material was included in its finished products delivered to the customer, as the delivered product included raw material of the same vendor lot that tested positive, the FDA, after being notified by the Company, initiated a recall of all consumer products including raw material from the affected vendor lot due to the potential for product contamination.
(i) The income tax expense (benefit) on non-GAAP adjustments is computed in accordance with ASC 740 using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based on the applicable statutory tax rate for each jurisdiction in which such charges were incurred. For the
second
quarter of
2017
, these non-GAAP adjustments were not subject to foreign tax credits or valuation allowances, but to the extent that such factors are applicable to any future non-GAAP adjustments we will take such factors into consideration in calculating the tax expense (benefit).
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Gross Profit
|
|
Reported (GAAP)
|
Restructuring and Other Charges (a)
|
Operational Improvement Initiative Costs (b)
|
Adjusted (Non-GAAP)
|
Gross profit
|
$
|
365,641
|
|
182
|
|
831
|
|
366,654
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Selling and Administrative Expenses
|
|
Reported (GAAP)
|
Acquisition and Related Costs (c)
|
Legal Charges/Credits (d)
|
Adjusted (Non-GAAP)
|
Selling and administrative expenses
|
$
|
132,784
|
|
(213
|
)
|
36
|
|
132,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Operating Profit
|
|
Reported (GAAP)
|
Restructuring and Other Charges (a)
|
Operational Improvement Initiative Costs (b)
|
Acquisition Related Costs (c)
|
Legal Charges/Credits (d)
|
Gain on Sale of Asset (e)
|
Adjusted (Non-GAAP)
|
Operating profit
|
$
|
164,672
|
|
182
|
|
831
|
|
213
|
|
(36
|
)
|
(197
|
)
|
165,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Net Income
|
|
Reported (GAAP)
|
Restructuring and Other Charges (a)
|
Operational Improvement Initiative Costs (b)
|
Acquisition Related Costs (c)
|
Legal Charges/Credits (d)
|
Gain on Sale of Asset (e)
|
Adjusted (Non-GAAP)
|
Income before taxes
|
$
|
152,050
|
|
182
|
|
831
|
|
213
|
|
(36
|
)
|
(197
|
)
|
$
|
153,043
|
|
Taxes on income (f)
|
$
|
35,317
|
|
35
|
|
208
|
|
(102
|
)
|
(9
|
)
|
(65
|
)
|
$
|
35,384
|
|
Net income
|
$
|
116,733
|
|
147
|
|
623
|
|
315
|
|
(27
|
)
|
(132
|
)
|
$
|
117,659
|
|
____________________
(a) Accelerated depreciation related to restructuring activities.
(b) Accelerated depreciation and severance costs in Hangzhou, China.
(c) Additional transaction costs related to the acquisition of Lucas Meyer, included in Selling and administrative expenses.
(d) Principally related to favorable tax rulings.
(e) Principally related to gain on sale of property in Europe.
(f) The income tax expense (benefit) on non-GAAP adjustments is computed in accordance with ASC 740 using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based on the applicable statutory tax rate for each jurisdiction in which such charges were incurred. For the
second
quarter of
2016
, these non-GAAP adjustments were not subject to foreign tax credits or valuation allowances, but to the extent that such factors are applicable to any future non-GAAP adjustments we will take such factors into consideration in calculating the tax expense (benefit).
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Gross Profit
|
|
Reported (GAAP)
|
Operational Improvement Initiative Costs (a)
|
Acquisition and Related Costs (b)
|
Integration related costs (c)
|
FDA mandated product recall
(i)
|
Adjusted (Non-GAAP)
|
Gross profit
|
$
|
739,255
|
|
1,066
|
|
10,908
|
|
186
|
|
3,500
|
|
$
|
754,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Selling and Administrative Expenses
|
|
Reported (GAAP)
|
Acquisition and Related Costs (b)
|
Integration related costs (c)
|
Legal Charges/Credits (d)
|
Tax Assessment (e)
|
Adjusted (Non-GAAP)
|
Selling and administrative expenses
|
$
|
276,240
|
|
(4,158
|
)
|
(1,485
|
)
|
(1,000
|
)
|
(5,331
|
)
|
$
|
264,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Operating Profit
|
|
Reported (GAAP)
|
Operational Improvement Initiative Costs (a)
|
Acquisition Related Costs (b)
|
Integration related costs (c)
|
Legal Charges/Credits (d)
|
Tax Assessment (e)
|
Restructuring and Other Charges (f)
|
Gain on Sale of Asset (g)
|
FDA mandated product recall
(i)
|
Adjusted (Non-GAAP)
|
Operating profit
|
$
|
296,578
|
|
1,066
|
|
15,066
|
|
1,923
|
|
1,000
|
|
5,331
|
|
10,934
|
|
(89
|
)
|
3,500
|
|
$
|
335,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Net Income
|
|
Reported (GAAP)
|
Operational Improvement Initiative Costs (a)
|
Acquisition Related Costs (b)
|
Integration related costs (c)
|
Legal Charges/Credits (d)
|
Tax Assessment (e)
|
Restructuring and Other Charges (f)
|
Gain on Sale of Asset (g)
|
CTA Realization (h)
|
FDA mandated product recall
(i)
|
Adjusted (Non-GAAP)
|
Income before taxes
|
$
|
280,527
|
|
1,066
|
|
15,066
|
|
1,922
|
|
1,000
|
|
5,331
|
|
10,934
|
|
(89
|
)
|
(12,217
|
)
|
3,500
|
|
$
|
307,040
|
|
Taxes on income (j)
|
$
|
54,968
|
|
266
|
|
4,610
|
|
606
|
|
354
|
|
1,885
|
|
2,892
|
|
(29
|
)
|
—
|
|
1,238
|
|
$
|
66,790
|
|
Net income
|
$
|
225,559
|
|
800
|
|
10,456
|
|
1,316
|
|
646
|
|
3,446
|
|
8,042
|
|
(60
|
)
|
(12,217
|
)
|
2,262
|
|
$
|
240,250
|
|
____________________
(a) Represents accelerated depreciation and idle labor costs in Hangzhou, China.
(b) Represents the amortization of inventory "step-up" related to the acquisitions of David Michael, Fragrance Resources and PowderPure, included in Cost of goods sold and transaction costs related to the acquisitions of Fragrance Resources and PowderPure, included in Selling and administrative expenses.
(c) Represents costs related to the integration of the David Michael and Fragrance Resources acquisitions.
(d) Represents additional charge related to litigation settlement.
(e) Represents the reserve for payment of a tax assessment related to commercial rent for prior periods.
(f) Represents severance costs related to the 2017 Productivity Program which were partially offset by the reversal of 2015 severance charges that were no longer needed.
(g) Represents gains on sale of assets.
(h) Represents the release of CTA related to the liquidation of a foreign entity.
(i) Represents an estimate of the Company's incremental direct costs and customer reimbursement obligations, in excess of the Company's sales value of the recalled products, arising from an FDA mandated recall of consumer products as a result of raw material received and identified by the Company as containing contamination. (As discussed in Note 13 of the Consolidated Financial Statements, the sales value of the recalled products was reserved in the first quarter of 2017). While the Company does not believe that any of the affected raw material was included in its finished products delivered to the customer, as the delivered product included raw material of the same vendor lot that tested positive, the FDA, after being notified by the Company, initiated a recall of all consumer products including raw material from the affected vendor lot due to the potential for product contamination.
(j) The income tax expense (benefit) on non-GAAP adjustments is computed in accordance with ASC 740 using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based on the applicable statutory tax rate for each jurisdiction in which such charges were incurred, except for those items which are non-taxable for which the tax expense (benefit) was calculated at 0%. For the first
six
months of
2017
, these non-GAAP adjustments were not subject to foreign tax credits or valuation allowances, but to the extent that such factors are applicable to any future non-GAAP adjustments we will take such factors into consideration in calculating the tax expense (benefit).
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Gross Profit
|
|
Reported (GAAP)
|
Restructuring and Other Charges (a)
|
Operational Improvement Initiative Costs (b)
|
Acquisition and Related Costs (c)
|
Adjusted (Non-GAAP)
|
Gross profit
|
$
|
725,849
|
|
283
|
|
1,099
|
|
889
|
|
728,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Selling and Administrative Expenses
|
|
Reported (GAAP)
|
Acquisition and Related Costs (c)
|
Legal Charges/Credits (d)
|
Adjusted (Non-GAAP)
|
Selling and Administrative Expenses
|
$
|
256,327
|
|
(360
|
)
|
1,482
|
|
$
|
257,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Operating Profit
|
|
Reported (GAAP)
|
Restructuring and Other Charges (a)
|
Operational Improvement Initiative Costs (b)
|
Acquisition Related Costs (c)
|
Legal Charges/Credits (d)
|
Gain on Sale of Asset (e)
|
Adjusted (Non-GAAP)
|
Operating profit
|
$
|
334,604
|
|
283
|
|
1,099
|
|
1,249
|
|
(1,482
|
)
|
(2,910
|
)
|
332,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Reconciliation of Net Income
|
|
Reported (GAAP)
|
Restructuring and Other Charges (a)
|
Operational Improvement Initiative Costs (b)
|
Acquisition Related Costs (c)
|
Legal Charges/Credits (d)
|
Gain on Sale of Asset (e)
|
Adjusted (Non-GAAP)
|
Income before taxes
|
$
|
306,947
|
|
283
|
|
1,099
|
|
1,249
|
|
(1,482
|
)
|
(2,910
|
)
|
$
|
305,186
|
|
Taxes on income (f)
|
$
|
71,610
|
|
54
|
|
275
|
|
266
|
|
(411
|
)
|
(637
|
)
|
$
|
71,157
|
|
Net income
|
$
|
235,337
|
|
229
|
|
824
|
|
983
|
|
(1,071
|
)
|
(2,273
|
)
|
$
|
234,029
|
|
____________________
(a) Accelerated depreciation related to restructuring activities.
(b) Accelerated depreciation and severance costs in Hangzhou, China.
(c) Expense related to the amortization of inventory step-up, included in Cost of goods sold, and additional transaction costs related to the acquisition of Lucas Meyer, included in Selling and administrative expenses.
(d) Settlements due to favorable tax rulings in jurisdictions for which reserves were previously recorded for ongoing tax disputes.
(e) Principally related to gain on sale of property in Europe.
(f) The income tax expense (benefit) on non-GAAP adjustments is computed in accordance with ASC 740 using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based on the applicable statutory tax rate for each jurisdiction in which such charges were incurred. For the first
six
months of
2016
, these non-GAAP adjustments were not subject to foreign tax credits or valuation allowances, but to the extent that such factors are applicable to any future non-GAAP adjustments we will take such factors into consideration in calculating the tax expense (benefit).
B. Foreign Currency Reconciliation
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating Profit:
|
|
|
|
|
|
|
|
% Change - Reported (GAAP)
|
(3)%
|
|
11%
|
|
(11)%
|
|
7%
|
Items impacting comparability
(1)
|
7%
|
|
(4)%
|
|
12%
|
|
(2)%
|
% Change - Adjusted (Non-GAAP)
|
4%
|
|
7%
|
|
1%
|
|
5%
|
Currency Impact
|
3%
|
|
—%
|
|
4%
|
|
2%
|
% Change Year-over-Year - Currency Neutral Adjusted (Non-GAAP)**
|
6%
|
*
|
7%
|
|
5%
|
|
7%
|
_______________________
(1) Includes
$12.7 million
of acquisition-related costs, costs associated with product recalls, legal charges, restructuring, integration-related and operational improvement initiative costs as well as gains on sales of fixed assets and
$1.0 million
related to operational improvement initiative, acquisition-relation and restructuring costs which were partially offset by gains on sales of fixed assets and a favorable legal settlement for the three months ended
June 30, 2017
and
June 30, 2016
, respectively. Includes
$38.7 million
consisting of acquisition-related costs, costs associated with product recalls, legal charges, restructuring, integration-related and operational improvement initiative costs as well as gains on sales of fixed assets and excludes a benefit of
$1.8 million
related to gains on sales of fixed assets and a favorable legal settlement, which were only partially offset by acquisition-related, operational improvement initiative and restructuring costs for the
six
months ended
June 30, 2017
and
June 30, 2016
, respectively.
** Currency neutral amount is calculated by translating prior year amounts at the exchange rates used for the corresponding
2017
period. Currency neutral operating profit also eliminates the year-over-year impact of cash flow hedging.
* The sum of these items does not foot due to rounding.
C. Acquisition Related Intangible Asset Amortization
The Company tracks the amount of amortization recorded on recent acquisitions in order to monitor its progress with respect to its Vision 2020 goals. The following amounts were recorded with respect to recent acquisitions:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(DOLLARS IN MILLIONS)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amortization Expense:
|
|
|
|
|
|
|
|
PowderPure
|
$0.6
|
|
$—
|
|
$0.6
|
|
$—
|
Fragrance Resources
|
1.5
|
|
—
|
|
2.8
|
|
—
|
David Michael
|
1.1
|
|
—
|
|
1.7
|
|
—
|
Lucas Meyer
|
1.9
|
|
1.7
|
|
3.8
|
|
4.3
|
Ottens Flavors
|
1.6
|
|
1.6
|
|
3.1
|
|
3.2
|