424B5
Table of Contents

Filed Pursuant to Rule 424(b)(5)

Registration No. 333-209889

 

 

Title of Each Class of Securities to be Registered   Amount to be
Registered(1)
  Maximum Offering
Price per Unit(1)
  Maximum
Aggregate Offering
Price(1)
  Amount of
Registration Fee(2)

Common Stock, par value $0.125 per share

  12,667,947   $130.25   $1,650,000,096.75   $205,425.01

 

 

 

(1)

Assumes full exercise of the underwriters’ option to purchase up to an additional 1,151,632 shares of our Common Stock.

 

(2)

Calculated in accordance with Rule 457(r) of the Securities Act of 1933, as amended.


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PROSPECTUS SUPPLEMENT

(to Prospectus dated August 6, 2018)

11,516,315 Shares

 

 

LOGO

INTERNATIONAL FLAVORS & FRAGRANCES INC.

Common Stock

 

 

We are offering 11,516,315 shares of our common stock, par value $0.125 per share (“Common Stock”).

We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus supplement, to purchase up to 1,151,632 additional shares of our Common Stock at the public offering price less the underwriting discount. See “Underwriting” in this prospectus supplement.

On May 7, 2018, International Flavors & Fragrances Inc. (“IFF”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Frutarom Industries Ltd., a company organized under the laws of the State of Israel (“Frutarom”), and Icon Newco Ltd., a company organized under the laws of the State of Israel and a wholly owned subsidiary of IFF (“Merger Sub”). Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, and in accordance with the Companies Law 5759-1999 of the State of Israel (together with the rules and regulations thereunder, the “ICL”), Merger Sub will merge with and into Frutarom (the “Merger”), with Frutarom continuing as the surviving company in the Merger and a wholly owned subsidiary of IFF.

Our Common Stock is listed on the NYSE and Euronext Paris under the symbol “IFF”. On September 12, 2018, the last reported sale price of our Common Stock on the NYSE was $131.15 per share.

Concurrently with this offering of Common Stock, we are offering $750 million in aggregate amount of our tangible equity units (or up to $825 million in tangible equity units if the underwriters for that offering exercise their option to purchase additional tangible equity units) pursuant to a separate prospectus supplement. The completion of this Common Stock offering is not contingent on the completion of the tangible equity units offering, and the completion of the tangible equity units offering is not contingent on the completion of this Common Stock offering. Neither this offering nor the tangible equity units offering is contingent on the completion of the Merger or any debt financing. If the Merger is not consummated, we intend to use the net proceeds from this offering for general corporate purposes, as described under “Use of Proceeds.”

Subsequent to this offering, we expect to offer, pursuant to separate prospectus supplements, approximately $2,750 million aggregate principal amount of senior notes at varying maturities, a portion of which may be denominated in currencies other than the U.S. dollar, as additional financing for the Merger. This prospectus supplement is not an offer to sell or a solicitation of an offer to buy any notes being offered in the notes offering.

 

 

Investing in our Common Stock involves significant risks. See “Risk Factors” in this prospectus supplement and the documents incorporated by reference in this prospectus supplement and the accompanying prospectus, including our Annual Report on Form 10-K for the year ended December 31, 2017.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Public offering price(1)

   $ 130.250000      $ 1,500,000,028.75  

Underwriting discount and commissions

   $ 3.712125      $ 42,750,000.82  

Proceeds, before expenses, to International Flavors & Fragrances Inc.

   $ 126.537875      $ 1,457,250,027.93  

The underwriters expect to deliver the shares of Common Stock to purchasers on or about September 17, 2018.

 

 

Joint Book-Running Managers

 

Morgan Stanley   Citigroup   J.P. Morgan

Senior Lead Manager

BNP PARIBAS

Co-Managers

 

          BTIG   Citizens Capital Markets   ING          
          MUFG   Wells Fargo Securities   HSBC          

The date of this prospectus supplement is September 12, 2018.


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TABLE OF CONTENTS

 

     Page  
Prospectus Supplement

 

SUMMARY

     S-1  

SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA OF IFF

     S-8  

SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF FRUTAROM

     S-10  

RISK FACTORS

     S-11  

FORWARD-LOOKING STATEMENTS

     S-20  

USE OF PROCEEDS

     S-22  

CAPITALIZATION

     S-23  

PRICE RANGE OF COMMON STOCK AND DIVIDENDS

     S-25  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     S-26  

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

     S-48  

UNDERWRITING

     S-50  

LEGAL MATTERS

     S-55  

EXPERTS

     S-55  

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

     S-56  

FRUTAROM INDUSTRIES LTD. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

     Page  
Prospectus

 

ABOUT THIS PROSPECTUS

     1  

THE COMPANY

     2  

RISK FACTORS

     3  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     4  

USE OF PROCEEDS

     6  

RATIO OF EARNINGS TO FIXED CHARGES

     7  

DESCRIPTION OF COMMON STOCK

     8  

DESCRIPTION OF DEBT SECURITIES

     10  

DESCRIPTION OF PURCHASE CONTRACTS

     19  

DESCRIPTION OF UNITS

     20  

PLAN OF DISTRIBUTION

     21  

LEGAL MATTERS

     23  

EXPERTS

     23  

WHERE YOU CAN FIND MORE INFORMATION; INCORPORATION BY REFERENCE

     23  

 

 

Unless we have indicated, or the context otherwise requires, references in this prospectus supplement to “IFF,” “the Company,” “we,” “us,” “our,” or similar terms are to International Flavors & Fragrances Inc. and its subsidiaries.

 

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ABOUT THIS PROSPECTUS SUPPLEMENT

We are providing information to you about this offering in two parts. The first part is this prospectus supplement, which provides the specific details regarding this offering. The second part is the accompanying prospectus, which provides general information. Generally, when we refer to this “prospectus,” we are referring to both documents combined. This prospectus supplement may add, update or change information contained in or incorporated by reference in the accompanying prospectus. Some of the information contained in or incorporated by reference in the accompanying prospectus may not apply to this offering. If the information in this prospectus supplement or the information incorporated by reference in this prospectus supplement is inconsistent with information contained in or incorporated by reference in the accompanying prospectus, you should rely on the information in this prospectus supplement or the information incorporated by reference in this prospectus supplement.

We are responsible for the information contained and incorporated by reference in this prospectus supplement, the accompanying prospectus and in any free writing prospectus with respect to this offering filed by us with the Securities and Exchange Commission (the “SEC”). We have not, and the underwriters have not, authorized anyone to give you any other information, and we take no responsibility for any other information that others may give you. This prospectus supplement, the accompanying prospectus and any such free writing prospectus may be used only for the purposes for which they have been prepared. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus supplement, the accompanying prospectus, any free writing prospectus and the documents incorporated by reference herein and therein is accurate as of any date other than their respective dates. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.

The shares of Common Stock are being offered for sale only in jurisdictions where it is lawful to make such offers. The distribution of this prospectus supplement and the accompanying prospectus and the offering of the shares of Common Stock in certain jurisdictions may be restricted by law. Persons outside the United States who receive this prospectus supplement and the accompanying prospectus should inform themselves about and observe any such restrictions. This prospectus supplement and the accompanying prospectus do not constitute, and may not be used in connection with, an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. See “Underwriting” in this prospectus supplement.

Unless we specifically state otherwise, the information in this prospectus supplement and the accompanying prospectus, including the documents incorporated by reference herein and therein, assumes the completion of the concurrent tangible equity units offering described herein and that the underwriters for this Common Stock offering do not exercise their option to purchase additional shares of Common Stock and the underwriters of the concurrent tangible equity units offering do not exercise their option to purchase additional tangible equity units. In addition, unless we specifically state otherwise, the information in this prospectus supplement and the accompanying prospectus, including the documents incorporated by reference herein and therein, does not give effect to the Merger or the Debt Financings (each as defined below).

 

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SUMMARY

This summary is not complete and does not contain all of the information that may be important to you. You should read the entire prospectus supplement and accompanying prospectus carefully, including the section entitled “Risk Factors,” as well as the documents incorporated by reference, before making an investment decision.

The Company

We are a leading innovator of sensory experiences that move the world. We co-create unique products that consumers taste, smell, or feel in fine fragrances and beauty, detergents and household goods, and food and beverages. Our approximately 7,300 team members globally take advantage of our capabilities in consumer insights, research and product development (“R&D”), creative expertise and customer intimacy to partner with our customers in developing innovative and differentiated offerings for consumer products. We believe that our collaborative approach will generate market share gains for our customers.

Our international presence positions us to serve both our global customers and the increasing number of regional and high-end and middle-market specialty consumer goods producers. We operate thirty-seven manufacturing facilities and sixty-nine creative centers and application laboratories located in thirty-seven different countries. We partner with our customers to develop over 46,000 products that are provided to customers in approximately 162 countries.

We principally compete in the flavors and fragrances market, which is part of a larger market that supplies a wide variety of ingredients and compounds used in consumer products. The broader market includes large multi-national companies and smaller regional and local participants that supply products such as seasonings, texturizers, spices, enzymes, certain food-related commodities, fortified products and cosmetic ingredients. The global market for flavors and fragrances has expanded consistently, primarily as a result of an increase in demand for, and an increase in the variety of, consumer products containing flavors and fragrances. Management estimates that in 2017 the flavors and fragrances market was approximately $24.8 billion, and forecasted to grow approximately 2-3% by 2021, primarily driven by expected growth in emerging markets.

In 2017, we achieved sales of approximately $3.4 billion, making us one of the top four companies in the global flavors and fragrances sub-segment of the broader consumer products ingredients and compounds market. We believe that our global presence, diversified business platform, broad product portfolio and global and regional customer base position us to achieve long-term growth as the flavors and fragrances markets expand.

We operate in two business segments, Flavors and Fragrances. In 2017, our Flavors business represented 48% of our sales, while our Fragrances business represented 52% of sales. Our business is geographically diverse, with sales to customers in the four regions set forth below:

 

Region

   % of 2017 Sales  

Europe, Africa, Middle East

     31

Greater Asia

     27

North America

     27

Latin America

     15

We are committed to winning in emerging markets. We believe that more significant future growth potential for the flavors and fragrances industry, and for our business, exists in the emerging markets (all markets except North America, Japan, Australia, and Western, Southern and Northern Europe). Over the past five years our currency neutral sales growth rate in emerging markets has outpaced that of developed markets. We expect this long-term trend to continue for the foreseeable future.



 

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We have operated in some of the largest emerging markets for multiple decades. As a result of these established operations, sales in emerging markets represented 48% of 2017 sales and 51% of 2016 sales. As our customers seek to grow their businesses in emerging markets, we provide them the ability to leverage our long-standing international presence and extensive market knowledge to help drive their brands in these markets. To stay competitive in our industry, we must adapt to rapidly shifting consumer preferences and customer demands. We believe our consumer insights and customer relationships help to drive innovation that benefits us and our customers. During 2017, our 25 largest customers accounted for 50% of our sales. Sales to our largest customer across all end-use categories accounted for 11% to 12% of our sales for each of the last three fiscal years. These sales were principally in our Fragrances business.

Our Strategic Priorities

We are focused on generating sustainable profitable growth in our business and positioning our portfolio for long-term growth. We have continued to execute against the four pillars of our Vision 2020 strategy originally announced in 2015 and refreshed in 2017, which focuses on building differentiation and accelerating growth to create shareholder value:

 

(1)

Innovating Firsts—We seek to strengthen our position by driving differentiation in priority R&D platforms across both businesses. In 2017, we launched three captive fragrance molecules and three new flavor modulators. We achieved continued growth of our sweetness and savory modulation portfolio sales and encapsulated-related sales. We also launched Re-Imagine, a program to accelerate flavor innovation and increase agility to capture unmet opportunities in the changing food and beverage market.

 

(2)

Winning Where We CompeteOur goal is to achieve a #1 or #2 market leadership position in key markets and categories and with specific customers. In 2017, we grew our sales in both our Flavors and Fragrances businesses in North America and the Middle East and Africa geographic area we targeted for growth. We also created Tastepoint by IFF, designed to leverage our expertise in and to service the middle-market customer in North America, and opened an expanded facility in Cairo, Egypt to support our regional focus on growth in the Middle East and Africa.

 

(3)

Becoming Our Customers’ Partner of Choice—Our goal is to attain commercial excellence by providing our customers with in-depth, local consumer understanding, industry-leading innovation, outstanding service and the highest quality products. In 2017, we introduced IFF Taste Design, a combination of artisanal, handcrafted techniques and proprietary technologies that drive consumer preference and market differentiation. In addition, we were rated gold by EcoVadis for sustainability, received an “A” rating and were awarded leadership status for our climate change and an “A-” for water management strategy by CDP.

 

(4)

Strengthening and Expanding the Portfolio—We actively pursue value-creation through partnerships, collaborations, and acquisitions within flavors, fragrances and adjacencies. We prioritize opportunities that provide (i) access to new technologies, (ii) the ability to increase our market share in key markets and with key customers or (iii) access to adjacent products or services that will position us to leverage our expertise in science and technology and our customer base. During 2017, we acquired Fragrance Resources to further improve our market position with regional customers in specialty fine fragrances, and PowderPure to further expand product offerings of clean label flavors solutions. We also became the first sensorial innovator of flavors, fragrances and cosmetic actives to join the MIT Media Lab, a leader in research and technologies that transform the everyday for consumers around the world.

General

Our principal executive offices are located at 521 West 57th Street, New York, New York 10019. Our telephone number at that location is (212) 765-5500. Our home page on the internet is www.iff.com. Other than the information expressly set forth or incorporated by reference, the information contained, or referred to, on our website is not part of this prospectus supplement or the accompanying prospectus.



 

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Recent Developments

Acquisition of Frutarom

On May 7, 2018, IFF entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Frutarom Industries Ltd., a company organized under the laws of the State of Israel (“Frutarom”), and Icon Newco Ltd., a company organized under the laws of the State of Israel and a wholly owned subsidiary of IFF (“Merger Sub”). Frutarom, through its subsidiaries, develops, produces and markets flavors and fine ingredients used in manufacturing food, beverages, flavors and fragrances, pharma/nutraceuticals, cosmetics and personal care products.

We believe that the acquisition of Frutarom will provide us with several strategic and financial benefits, including:

 

   

Differentiated Portfolio with Enhanced Capabilities: In addition to IFF’s and Frutarom’s complementary flavor capabilities, we expect that Frutarom’s portfolio will provide opportunities to expand into attractive and fast-growing categories, such as natural colors, enzymes, antioxidants and health ingredients. We believe that the combined company’s increased breadth of products will provide complementary offerings and expanded choices to its customers.

 

   

Complementary and Growing Customer Base: We expect that Frutarom’s customer base will provide IFF with increased exposure to fast-growing small- and mid-sized customers, including private label manufacturers.

 

   

Synergy Potential: IFF and Frutarom expect to realize approximately $145 million of run-rate cost synergies by the third full year after the completion of the merger, with approximately 25% of such synergies expected to be achieved in the first full year. We believe that cross-selling opportunities and integrated solutions will provide revenue synergies, creating further value to shareholders over time.

Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, and in accordance with the ICL, Merger Sub will merge with and into Frutarom, with Frutarom continuing as the surviving company in the Merger and a wholly owned subsidiary of IFF. We refer in this prospectus supplement to our acquisition of Frutarom pursuant to the Merger Agreement as the “Merger.” Under the terms of the Merger Agreement, for each share of outstanding stock of Frutarom, Frutarom shareholders will receive $71.19 in cash and 0.2490 of a share of IFF’s Common Stock, or an aggregate of approximately $4,238.8 million and 14.8 million shares based on the number of Frutarom’s outstanding ordinary shares and share-based awards as of May 7, 2018, the date of the Merger Agreement, and without taking into account this Common Stock offering or the tangible equity units offering.

Consummation of the Merger is subject to customary closing conditions. The shareholders of Frutarom approved the Merger on August 6, 2018. The completion of the Merger is not subject to the approval of IFF shareholders or the receipt of financing by IFF. As of the date of this prospectus supplement, the completion of the Merger remains subject to the following closing conditions: (i) the receipt of regulatory clearance under certain foreign antitrust laws, including the European Union; (ii) receipt of all governmental and stock exchange approvals necessary for the issuance and listing of shares of IFF Common Stock as contemplated by the Merger Agreement, (iii) the absence of any order, or the enactment of any law, prohibiting the Merger; (iv) subject to certain exceptions, the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the Merger Agreement; and (v) the absence of any material adverse effect on Frutarom or the Company since the date of the Merger Agreement. The Merger Agreement also contains certain termination rights for IFF and Frutarom.



 

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The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by the full text of such agreement. The Merger Agreement is an exhibit to the registration statement to which this prospectus supplement relates.

Merger Financing

IFF anticipates that approximately $4.3 billion will be required to pay the aggregate cash portion of the Merger consideration to the Frutarom shareholders and to pay fees and expenses relating to the Merger.

In addition to the proceeds from this Common Stock offering, IFF intends to obtain or otherwise incur additional financing for the Merger as follows:

Concurrent Tangible Equity Units Offering

Concurrently with this offering of Common Stock, we are offering $750 million in aggregate amount of our tangible equity units (or up to $825 million in tangible equity units if the underwriters for that offering exercise their option to purchase additional tangible equity units) pursuant to a separate prospectus supplement. This prospectus supplement is not an offer with respect to the concurrent tangible equity units offering.

Debt Financings

We intend to obtain or otherwise incur up to approximately $3.1 billion of indebtedness to fund the Merger, and related fees and expenses, which we refer to in this prospectus supplement as the “Debt Financings.” We currently expect that the Debt Financings will include:

 

   

Notes Offerings. Subsequent to this Common Stock offering, we expect to offer, pursuant to separate prospectus supplements, approximately $2,750 million aggregate principal amount of senior notes (the “New Notes”) at varying maturities, a portion of which may be denominated in currencies other than the U.S. dollar. This prospectus supplement is not an offer with respect to the potential New Notes offering.

 

   

Term Loan. On June 6, 2018, IFF entered into a senior unsecured term loan credit agreement (the “New Term Loan”) with the lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, that provides for a three-year $350 million senior unsecured term loan facility. The commitments under the New Term Loan terminate on February 7, 2019 or, under certain circumstances, on May 7, 2019.

In connection with entering into the Merger Agreement, IFF entered into a debt commitment letter, dated as of May 7, 2018, with Morgan Stanley Senior Funding, Inc., that provided for a commitment for an up to $5.45 billion 364-day bridge loan facility (the “Bridge Facility”) to the extent IFF has not received $5.45 billion of net cash proceeds (and/or qualified bank commitments) from a combination of (a) the issuance by IFF of a combination of equity securities, equity-linked securities and/or unsecured debt securities and/or (b) unsecured term loans, in each case, at or prior to completion of the Merger. The commitments under the debt commitment letter terminate on February 7, 2019 or, under certain circumstances, on May 7, 2019. Although we do not currently expect to incur any borrowings under the Bridge Facility, there can be no assurance that such borrowings will not be made. In that regard, we may be required to borrow under the Bridge Facility if we do not generate sufficient net proceeds from this Common Stock offering, the concurrent tangible equity units offering, the New Notes offering or unsecured term loans to finance the Merger and related fees and expenses.

The completion of this Common Stock offering is not contingent on the completion of the tangible equity units offering, the Debt Financings or the Merger. Accordingly, even if the Merger or the other financing



 

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transactions do not occur, the shares of Common Stock sold in this offering will remain outstanding, and investors will not have any rights to require us to repurchase, redeem or repay any shares of Common Stock sold in this offering.

In addition, if the Merger is not consummated, we do not expect any debt under the New Term Loan to be incurred, and we expect the terms of the New Notes to contain a special mandatory redemption requirement if the Merger is not consummated by a specified date. See “Use of Proceeds.”

We cannot assure you that we will complete the Merger or any of the other financing transactions on the terms contemplated in this prospectus supplement or at all.

About Frutarom

Frutarom is a global company established in Israel in 1933 and operating in the global flavors and specialty fine ingredients markets. Frutarom, through its subsidiaries, develops, produces and markets flavors and fine ingredients used in manufacturing food, beverages, flavors and fragrances, pharma/nutraceuticals, cosmetics and personal care products. As of December 31, 2017, Frutarom operated 72 production sites, 90 research and development laboratories, and 109 sales offices in Europe, North America, Latin America, Israel, Asia, Africa and New Zealand, and employed 5,223 people throughout the world. In 2017, Frutarom marketed and sold over 70,000 products to more than 30,000 customers in more than 150 countries.

Frutarom operates in two main activities which constitute its core businesses and are reported as business segments in its financial statements: flavors activity and specialty fine ingredients activity. In addition, as part of a comprehensive solution offered to customers, Frutarom imports and markets raw materials manufactured by third parties. This activity is presented as part of trade and marketing operations, which is not a core business.

Frutarom generated sales of $1,362.4 million, $1,147.0 million, and $872.8 million for the twelve months ended December 31, 2017, December 31, 2016, and December 31, 2015, respectively. Sales for the six months ended June 30, 2018 and June 30, 2017 were $786.1 million and $646.1 million, respectively. During the twelve months ended December 31, 2017, December 31, 2016, and December 31, 2015, Frutarom’s net income was $151.6 million, $111.1 million, and $96.1 million, respectively. Net income for the six months ended June 30, 2018 and June 30, 2017 was $98.6 million and $70.9 million, respectively.



 

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The Offering

 

Issuer

International Flavors & Fragrances Inc., a New York corporation

 

Securities Offered

11,516,315 shares of Common Stock

 

Shares of Common Stock Outstanding after this Offering

 
 90,564,368 shares of Common Stock (or up to 91,716,000 shares if the underwriters exercise their option to purchase additional shares), which is based on 79,048,053 shares of Common Stock outstanding as of September 4, 2018 and excludes:

 

   

an additional 938,995 shares of Common Stock available for issuance under our stock compensation plans as of August 24, 2018;

 

   

5,758,500 shares of Common Stock reserved for issuance upon conversion of tangible equity units (assuming no exercise of the underwriters’ option to purchase additional tangible equity units in the concurrent tangible equity units offering); and

 

   

an estimated 14,826,119 shares of Common Stock issuable as consideration upon closing of the Merger.

 

Common Stock NYSE Symbol

IFF

 

Underwriters’ Option

We have granted the underwriters an option, exercisable within a 30-day period, to purchase up to an additional 1,151,632 shares of our Common Stock at the public offering price less the underwriting discount.

 

Use of Proceeds

We estimate that the net proceeds to us from this Common Stock offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $1,456 million (or up to approximately $1,602 million if the underwriters exercise their option to purchase additional shares of our Common Stock). We intend to use the net proceeds from this offering, together with the net proceeds from the concurrent tangible equity units offering, the Debt Financings and cash on hand to finance the Merger and to pay related fees and expenses. If for any reason the Merger is not consummated, we intend to use the net proceeds from this offering for general corporate purposes, as described under “Use of Proceeds.”

 

Concurrent Tangible Equity Units Offering

Concurrently with this Common Stock offering, we are offering $750 million in aggregate amount of our tangible equity units (or up to $825 million of our tangible equity units if the underwriters for that offering exercise their option to purchase additional tangible equity units solely to cover over-allotments, if any), each with a stated amount of $50, in an underwritten public offering pursuant to a separate prospectus supplement. This prospectus supplement is not an offer with respect to the concurrent tangible equity units offering.



 

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There can be no assurance that the tangible equity units offering will be completed. The completion of this Common Stock offering is not contingent on the completion of the tangible equity units offering, and the completion of the tangible equity units offering is not contingent on the completion of this Common Stock offering. Neither this Common Stock offering nor the tangible equity unit offering is contingent on the consummation of the Merger or any debt financing.

 

Risk Factors

Investing in our Common Stock involves significant risks. See “Risk Factors” in this prospectus supplement, as well as other information included in or incorporated by reference into this prospectus supplement and the accompanying prospectus, including our Annual Report on Form 10-K for the year ended December 31, 2017, for a discussion of the factors you should carefully consider before deciding to invest in our Common Stock.


 

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SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA OF IFF

The following table presents selected historical consolidated financial data for IFF and unaudited pro forma combined financial data for IFF and Frutarom as of the dates and for the periods indicated. The historical statement of income data and cash flow data for IFF for the fiscal years ended December 31, 2017, 2016 and 2015 and the historical balance sheet data as of December 31, 2017 and 2016 have been obtained from IFF’s audited consolidated financial statements included in IFF’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus supplement and accompanying prospectus. The historical statement of income data and cash flow data for IFF for the six-month periods ended June 30, 2018 and 2017 and the historical balance sheet data as of June 30, 2018 have been obtained from IFF’s unaudited interim consolidated financial statements included in IFF’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, which is incorporated by reference into this prospectus supplement and accompanying prospectus. The historical balance sheet data as of June 30, 2017 has been derived from IFF’s unaudited consolidated financial statements included in IFF’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, which is not incorporated by reference into this prospectus supplement or accompanying prospectus. The historical statement of income data for IFF included below for the fiscal years ended December 31, 2017, 2016 and 2015 and IFF’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus supplement and accompanying prospectus, have not been revised to reflect the required retrospective adoption of the Financial Accounting Standards Board amendment to Compensation—Retirement Benefits guidance (ASU 2017-07), which we refer to as the “FASB amendment”, as the guidance had no impact on net income and the effect of the revision was not material for those periods. For more information on the adoption of the FASB amendment, please refer to IFF’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, which is incorporated by reference into this prospectus supplement and accompanying prospectus. The unaudited pro forma combined financial data are based upon the historical consolidated financial data of IFF and Frutarom, after giving effect to the merger as of the dates and for the periods indicated. The unaudited pro forma combined financial data should be read in conjunction with the financial statements presented in “Unaudited Pro Forma Condensed Combined Financial Information” in this prospectus supplement and the related notes thereto.



 

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The results of operations for the six-month period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2018, and you should not assume the results of operations for any past periods indicate results for any future period. The information set forth below should be read together with the other information contained in IFF’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and IFF’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes therein. See the section entitled “Incorporation of Certain Information by Reference.”

 

    Pro Forma
Combined
    Historical International
Flavors & Fragrances
Inc.
    Pro Forma
Combined
    Historical International Flavors &
Fragrances Inc.
 
Dollars in thousands except per share
amounts
  Six-Month
Period
Ended
June 30,
    Six-Month Period Ended
June 30,
    Year Ended
December 31,
    Year Ended December 31,  
    2018     2018     2017     2017     2017     2016     2015  

Statement of Income Data:

             

Net sales

  $ 2,637,054     $ 1,850,944     $ 1,671,154     $ 4,761,115     $ 3,398,719     $ 3,116,350     $ 3,023,189  

Cost of goods sold

    1,513,347       1,046,419       935,088       2,763,527       1,919,718       1,717,280       1,671,590  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,123,707       804,525       736,066       1,997,588       1,479,001       1,399,070       1,351,599  

Research and development expenses

    184,014       153,244       144,887       339,113       286,026       254,263       246,101  

Selling and administrative expenses

    429,236       300,051       283,023       816,476       557,311       566,224       494,517  

Restructuring and other charges, net

    1,903       1,903       10,934       19,371       19,711       (1,700     7,594  

Amortization of acquisition-related intangibles

    90,647       18,769       15,561       173,711       34,694       23,763       15,040  

Gain on sales of fixed assets

    504       1,195       (89     1,750       (184     (10,836      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    417,403       329,363       281,750       647,167       581,443       567,356       588,347  

Interest expense

    125,994       69,841       30,363       159,285       65,363       52,989       46,062  

Other (income) expense, net

    (33,161     (21,232     (29,140     (36,454     (20,965     (9,350     3,184  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    324,570       280,754       280,527       524,336       537,045       523,717       539,101  

Taxes on income

    60,190       52,190       54,968       233,584       241,380       118,686       119,854  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (Including noncontrolling interest)

    264,380           290,752        

Less: noncontrolling interest

    3,204           4,895        
 

 

 

       

 

 

       

Net Income

    261,176       228,564       225,559       285,857       295,665       405,031       419,247  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

             

Basic

    2.34       2.89       2.85       2.56       3.73       5.07       5.19  

Diluted

    2.31       2.87       2.84       2.54       3.72       5.05       5.16  

Cash dividends declared per share

      1.38       1.28         2.66       2.40       2.06  

Balance Sheet Data at Period End:

             

Total Assets

  $ 12,415,264     $ 4,673,442     $ 4,618,875       $ 4,598,926     $ 4,016,984    

Long-term debt

    4,078,015       1,717,189       1,636,338         1,632,186       1,066,855    

Total Shareholders’ Equity including noncontrolling interest

    5,632,979       1,756,203       1,680,086         1,689,294       1,631,134    


 

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SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF FRUTAROM

The following table presents selected historical consolidated financial data for Frutarom as of the dates and for the periods indicated. Frutarom’s financial data has been prepared under International Financial Reporting Standards (“IFRS”), as issued by the International Auditing Standards Board (“IASB”). The balance sheet data as of December 31, 2017 and 2016 and the statement of income data and cash flow data for the fiscal years ended December 31, 2017, 2016 and 2015 have been obtained from Frutarom’s audited annual consolidated financial statements, which are included in this prospectus supplement. The financial data as of and for the six-month periods ended June 30, 2018 and 2017 have been obtained from Frutarom’s unaudited, interim consolidated financial statements, which are included in this prospectus supplement.

The results of operations for the six-month period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2018, and you should not assume the results of operations for any past periods indicate results for any future period. The information set forth below should be read together with the other information contained in Frutarom’s audited annual consolidated financial statements and unaudited interim consolidated financial statements, which are included in this prospectus supplement.

 

Dollars in thousands except per share amounts    Six-Month Period Ended
June 30,
     Year Ended December 31,  
     2018     2017      2017      2016      2015  

Statement of Income Data:

             

Sales

   $ 786,110     $ 646,120      $ 1,362,396      $ 1,147,041      $ 872,796  

Cost of sales

     466,928       398,243        837,271        709,488        534,737  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     319,182       247,877        525,125        437,553        338,059  

Selling, marketing, research and development expenses—net

     134,697       101,792        220,014        196,001        141,237  

General and administrative expenses

     51,179       45,601        92,155        81,637        63,742  

Other expenses—net

     (315     385        3,392        11,772        2,826  

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

     1,326       444        1,402        1,113         
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     134,947       100,543        210,966        149,256        130,254  

Financial Expenses—net

     12,758       10,204        24,606        12,841        12,197  

Income before taxes on income

     122,189       90,339        186,360        136,415        118,057  

Income tax

     23,600       19,413        34,797        25,346        21,972  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     98,589       70,296        151,563        111,069        96,085  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

             

Basic

     1.64       1.17        2.52        1.85        1.62  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted

     1.63       1.17        2.51        1.84        1.60  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividends declared per share

          0.12        0.11        0.09  

Balance Sheet Data at Period End:

             

Total Assets

   $ 2,255,414     $ 1,790,072      $ 1,947,188      $ 1,585,461     

Long term loans, net of current maturities

     399,833       260,339        262,151        299,576     

Total equity

     921,420       768,856        878,913        664,604     


 

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RISK FACTORS

An investment in our Common Stock involves significant risks. You should consult with your own financial and legal advisers and carefully consider, among other matters, the following risks and those described in our Annual Report on Form 10-K for the year ended December 31, 2017, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018, respectively, and the other documents incorporated herein by reference. You should carefully consider the risks described in those reports and the other information in this prospectus supplement and accompanying prospectus before you decide to invest in our Common Stock. Such risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect us. If any of those risks were to occur, our financial condition, operating results and prospects, as well as the value of our Common Stock, could be materially adversely affected.

Risks Related to Our Business

For a discussion of risks related to our business and operations, please see “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2017, as well as similar disclosures contained in our other filings with the SEC that are incorporated by reference in this prospectus supplement and the accompanying prospectus. See “Incorporation of Certain Information by Reference.”

Risks Related to the Merger

If we are unable to complete the Merger, in a timely manner or at all, our business and our stock price may be adversely affected.

Our and Frutarom’s obligations to consummate the Merger are subject to the satisfaction or waiver of the following customary conditions, including: (i) the approval of the Merger Agreement and the Merger by the shareholders of Frutarom, which was obtained on August 6, 2018; (ii) the receipt of regulatory clearance under certain foreign antitrust laws, including the European Union; (iii) receipt of all governmental and stock exchange approvals necessary for the issuance and listing of shares of IFF Common Stock as contemplated by the Merger Agreement, (iv) the absence of any order, or the enactment of any law, prohibiting the Merger; (v) subject to certain exceptions, the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the Merger Agreement; and (vi) the absence of any material adverse effect on Frutarom or our company since the date of the Merger Agreement. Furthermore, our ability to access the bridge financing facility is subject to customary conditions. As many of these conditions are outside of our control, we cannot assure you if the conditions to the completion of the Merger and the associated financings will be satisfied in a timely manner or at all which may affect when and whether the Merger will occur. If the Merger is not completed, our share price could fall to the extent that our current price reflects an assumption that we will complete the Merger. Furthermore, if the Merger is not completed and the Merger Agreement is terminated, we may suffer other consequences that could adversely affect our business, results of operations and share price, including the following:

 

   

we have incurred and will continue to incur costs relating to the Merger (including significant legal and financial advisory fees) and many of these costs are payable by us whether or not the Merger is completed;

 

   

matters relating to the Merger (including integration planning) may require substantial commitments of time and resources by our management team, which could otherwise have been devoted to our historical core businesses or other opportunities that may have been beneficial to us;

 

   

we may be subject to legal proceedings related to the Merger or the failure to complete the Merger;

 

   

the failure to consummate the Merger may result in negative publicity and a negative impression of us in the investment community; and

 

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any disruptions to our business resulting from the announcement and pendency of the Merger, including any adverse changes in our relationships with our customers, suppliers and employees, may continue or intensify in the event the Merger is not consummated.

We may not realize the benefits anticipated from the Merger, which could adversely affect our stock price.

The Merger, if completed, will be our largest acquisition to date. The anticipated benefits from the Merger are, necessarily, based on projections and assumptions about the combined businesses of our company and Frutarom, which may not materialize as expected or which may prove to be inaccurate. Our ability to achieve the anticipated benefits will depend on our ability to successfully and efficiently integrate the business and operations of Frutarom with our business and achieve the expected synergies. We may encounter significant challenges with successfully integrating and recognizing the anticipated benefits of the potential Merger, including the following:

 

   

potential disruption of, or reduced growth in, our historical core businesses, due to diversion of management attention and uncertainty with our current customer and supplier relationships;

 

   

challenges arising from the expansion of our product offerings into adjacencies with which we have limited experience, including flavor ingredients, food additives and nutraceuticals;

 

   

challenges arising from the expansion into those Frutarom jurisdictions where we do not currently operate or have significant operations;

 

   

coordinating and integrating research and development teams across technologies and products to enhance product development while reducing costs;

 

   

consolidating and integrating corporate, information technology, finance and administrative infrastructures, and integrating and harmonizing business systems, which may be more difficult than anticipated due to the significant number of acquisitions completed by Frutarom over the past few years;

 

   

coordinating sales and marketing efforts to effectively position our capabilities and the direction of product development;

 

   

difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from combining Frutarom’s business with our business;

 

   

limitations prior to the completion of the Merger on the ability of management of our company and of Frutarom to conduct planning regarding the integration of the two companies;

 

   

the increased scale and complexity of our operations resulting from the Merger;

 

   

retaining key employees, suppliers and other partners of our company and Frutarom;

 

   

retaining and efficiently managing Frutarom’s expanded and decentralized customer base;

 

   

obligations that we will have to counterparties of Frutarom that arise as a result of the change in control of Frutarom;

 

   

difficulties in anticipating and responding to actions that may be taken by competitors in response to the transaction; and

 

   

the assumption of and exposure to unknown or contingent liabilities of Frutarom.

In addition, our anticipated benefits of the transaction with Frutarom contemplate significant cost-saving synergies. Consequently, even if we are able to successfully integrate the operations of Frutarom with ours, we may not realize the full benefits of the transactions if we are unable to identify and implement the anticipated cost savings or if the actions taken to implement such cost-savings have unintended consequences on our other business operations.

 

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If we do not successfully manage these issues and the other challenges inherent in integrating an acquired business of the scale of Frutarom, then we may not achieve the anticipated benefits of the Merger, we could incur unanticipated expenses and charges and our operating results and the value of our Common Stock could be materially and adversely affected.

Uncertainty about the Merger may adversely affect our relationships with customers and employees, which could negatively affect our business, whether or not the Merger is completed.

The announcement of the Merger on May 7, 2018, whether or not completed, may cause uncertainties in our relationships with our customers which could impair our ability to or expand our historical customer sales growth. Furthermore, uncertainties about the Merger may cause our current and prospective employees to experience uncertainty about their future with us. These uncertainties may impair our ability to retain, recruit or motivate key employees which could affect our business.

The Merger may result in significant charges or other liabilities that could adversely affect the financial results of the combined company.

The financial results of the combined company, following IFF’s acquisition of Frutarom, may be adversely affected by cash expenses and non-cash accounting charges incurred in connection with our integration of the business and operations of Frutarom. Furthermore, as a result of the transaction we will record a significant amount of goodwill and other intangible assets on our consolidated financial statements, which could be subject to impairment based upon future adverse changes in our business or prospects including our inability to recognize the benefits anticipated by the transaction.

In addition, upon the acquisition of Frutarom we will assume all their liabilities, including unknown and contingent liabilities that Frutarom assumed in connection with their acquisitions, that we failed or were unable to identify in the course of performing due diligence. Frutarom has completed 47 acquisitions since 2011, including 22 since the beginning of 2016. Our ability to accurately identify and assess the magnitude of the liabilities assumed by Frutarom in these acquisitions may be limited by, among other things, the information available to us and Frutarom and the limited operating experience that Frutarom has with these acquired entities. Furthermore, Frutarom has additional future obligations regarding certain of these acquisitions including outstanding earn-out obligations and put options requiring Frutarom to purchase additional shares in the target company, which we will assume upon consummation of the transaction. If we are not able to completely assess the scope of these liabilities or if these liabilities are neither probable nor estimable at this time, our future financial results could be adversely affected by unanticipated reserves or charges, unexpected litigation or regulatory exposure, unfavorable accounting charges, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on our business, operating results or financial condition. The price of our Common Stock following the Merger could decline to the extent the combined company’s financial results are materially affected by any of these events.

The regulatory approvals required in connection with the Merger may not be obtained or may contain materially burdensome conditions.

Completion of the Merger is conditioned upon the receipt of certain regulatory approvals, and we cannot provide assurance that these approvals will be obtained. If any conditions or changes to the proposed structure of the Merger are required to obtain these regulatory approvals, they may have the effect of jeopardizing or delaying completion of the Merger or reducing the anticipated benefits of the Merger. If we agree to any material conditions in order to obtain any approvals required to complete the Merger, the business and results of operations of the combined company may be adversely affected.

 

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The use of cash and incurrence of significant indebtedness in connection with the financing of the Merger may have an adverse impact on our liquidity, limit our flexibility in responding to other business opportunities and increase our vulnerability to adverse economic and industry conditions.

The Merger will be financed in part by the use of our cash on hand, the incurrence of a significant amount of indebtedness and issuances of equity. As of June 30, 2018, we had approximately $322.4 million of cash and cash equivalents and approximately $1,723.7 million of total debt outstanding. In connection with the Merger, we expect to incur significant new debt. The proceeds from the new debt are expected to be used to pay part of the purchase price, refinance existing debt of both our company and Frutarom and pay transaction related fees and expenses. If we are unable to raise financing on acceptable terms, we may need to rely on our bridge loan facility, which may result in higher borrowing costs and a shorter maturity than those from other anticipated financing alternatives. The use of cash on hand and indebtedness to finance the Merger will reduce our liquidity and could cause us to place more reliance on cash generated from operations to pay principal and interest on our debt, thereby reducing the availability of our cash flow for working capital, dividend and capital expenditure needs or to pursue other potential strategic plans. The increased indebtedness may also have the effect, among other things, of limiting our ability to obtain additional financing, if needed, limiting our flexibility in the conduct of our business and making us more vulnerable to economic downturns and adverse competitive and industry conditions.

Risks Related to our Common Stock

The market price of our Common Stock may be volatile and could fall.

The market price of our Common Stock has experienced, and may continue to experience, significant volatility. Between January 1, 2017 and September 12, 2018, the closing sale price of our Common Stock on the NYSE has ranged from a low of $115.26 per share to a high of $156.87 per share. Numerous factors, including many over which we have no control, may have a significant impact on the market price of our Common Stock. These risks include those described or referred to in this “Risk Factors” section and in the other documents incorporated herein by reference as well as, among other things:

 

   

failure to complete the Merger and, if completed, failure to realize the anticipated benefits of the Merger;

 

   

our operating and financial performance and prospects that vary from expectations of management, securities analysts and investors;

 

   

developments in our business or in sectors in which we operate generally;

 

   

our ability to repay our debt or adverse market reaction to any additional debt that we may incur;

 

   

the market valuation and operating and securities price performance of companies that investors consider to be comparable to us;

 

   

investor perceptions of us and the industry and markets in which we operate;

 

   

announcements of strategic developments, acquisitions and other material events by us or our competitors;

 

   

our dividend policy;

 

   

proposed or adopted regulatory changes or developments affecting the industries in which we operate;

 

   

future sales of equity or equity-related securities;

 

   

changes in earnings estimates or buy/sell recommendations by analysts;

 

   

anticipated or pending investigations, proceedings, or litigation that involve or affect us

 

   

actions by institutional shareholders; and

 

   

general financial, domestic, international, economic and other market conditions.

 

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In addition, the stock market experiences extreme price and trading volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our Common Stock, regardless of our operating performance. Furthermore, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly, which may cause us to incur substantial costs and could divert the time and attention of our management. As a result of these factors, among others, the value of your investment may decline because a decrease in the market price of our Common Stock would likely adversely impact the trading price of the amortizing notes.

Future sales of substantial amounts of our Common Stock could affect the market price of our Common Stock.

Future sales of substantial numbers of shares of our Common Stock, or securities convertible or exchangeable into shares of our Common Stock, into the public market, future issuances of substantial numbers of additional shares of Common Stock in connection with any future acquisitions or pursuant to employee benefit plans and future issuances of shares of Common Stock upon exercise of options or warrants or settlement of the purchase contracts, or perceptions that those sales, issuances and/or exercises or settlements could occur, could adversely affect the prevailing market price of our Common Stock and our ability to raise capital in the future.

This offering, the concurrent offering of tangible equity units and the issuance of additional stock in connection with acquisitions (including the Merger) or otherwise will dilute all other shareholdings.

Upon the issuance of the shares of Common Stock in this offering and the concurrent offering of tangible equity units, holders of our Common Stock will incur immediate and substantial net tangible book value dilution on a per share basis. After this offering and the concurrent offering of tangible equity units, we will have an aggregate of approximately 372.6 million (or as few as approximately 371.5 million if the underwriters for this offering exercise their option) authorized but unissued shares of Common Stock. Subject to certain volume limitations imposed by the NYSE, we may issue all of these shares without any action or approval by our stockholders, including, without limitation, in connection with acquisitions. Upon the completion of the Merger, in particular, based on the exchange ratio of 0.2490, the estimated number of shares of our Common Stock issuable as a portion of the Merger consideration is expected to be approximately 14.8 million shares. Any shares issued in connection with the activities described in this paragraph, our stock compensation plans or otherwise would dilute the percentage ownership held by holders of our Common Stock.

Risks Related to Frutarom

In addition to the risks we face, Frutarom also faces the following risks.

Frutarom’s operations are subject to effects of the global economy.

Due to the nature and type of its global activity, Frutarom is exposed to fluctuations in the global economy. Economic crisis and recession in various countries in which Frutarom operates could curb demand for Frutarom’s products and significantly slow down the development and launch of new products by Frutarom customers.

Frutarom’s operations in emerging markets are subject to political, economic and legal developments that are less predictable than those in developed markets.

Frutarom operates in a number of countries besides the United States and Western Europe, such as Russia, Ukraine, Turkey, Slovenia, Kazakhstan, China, countries in South and Central America (including Brazil, Guatemala, Peru, Chile and Mexico) and countries in northern, southern and western Africa, and is therefore

 

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exposed to political, economic and legal developments in these countries which are generally less predictable than in developed countries. Frutarom’s facilities in these countries could be subject to disruption as a result of economic and/or political instability as well as from nationalization and/or expropriation of assets situated there. There is also substantial risk relating to restrictions on Frutarom in collecting payment from its customers, distributors, or agents, as well as foreign exchange restrictions which could impede Frutarom’s ability to realize its profits or to sell its assets in these countries. While none of the emerging market countries in which Frutarom operates impose foreign exchange restrictions that affect Frutarom, such restrictions existed not long ago and there is no assurance that they will not be reinstated in the future.

Fluctuations or devaluations in currencies may negatively affect Frutarom’s results of operations.

Over 70% of Frutarom’s sales in 2017 were conducted in currencies other than the U.S. dollar, mainly the Euro, Russian Ruble, Pound Sterling, Swiss Franc, New Israeli Shekel, Chinese Yuan, Canadian Dollar, Brazilian Real, South African Rand, Peruvian Nuevo Sol and Mexican Peso, and changes in exchange rates affect Frutarom’s reported results in US dollar terms. In addition, in cases of extreme fluctuations in exchange rates, and since a large part of the raw materials used in the manufacture of Frutarom’s products is paid for in U.S. dollars, in Euros, or other currencies, there is no assurance that Frutarom can completely update its selling prices denominated in local currency (which is different from the currency used in buying the raw material) and maintain its margin. Frutarom does not generally undertake external hedging action nor does it use other financial instruments for protection against currency fluctuations. For further information see Frutarom’s audited financial statements included in this prospectus supplement.

Frutarom operates in a highly competitive industry.

Frutarom faces competition from large multinationals as well as medium-sized, small and local companies across the sectors in which it operates. Some of Frutarom’s competitors have greater financial and technological resources, larger sales and marketing platforms and more established reputation, and may therefore be better equipped to adapt to changes and industry trends.

The global market for flavors is characterized by close relations between flavor manufacturers and their customers, particularly with regard to large multinationals. Furthermore, many large multinational customers, along with increasing numbers of medium-sized customers in recent years, sometimes limit the number of their suppliers and work predominantly with a list of “approved suppliers.” To compete more effectively under these conditions, Frutarom must invest more resources in customer relations, in R&D and in matching products to customers’ needs in order to provide high quality and efficient service. Any failure to maintain good relations with its customers, forge strong relations with new customers, or secure the status of “approved supplier” with some of its customers could lead to substantial adverse effects on Frutarom’s business, operating results and financial condition.

The specialty fine ingredients market is more price sensitive than the flavors market and is characterized by relatively lower profit margins. Some fine ingredients products manufactured by Frutarom are less unique and more replaceable by competitors’ products. Production overcapacity for fine ingredients globally could also negatively impact Frutarom’s sales and profitability. Although as part of its strategy Frutarom focuses on specialty fine ingredients with higher profit margins, there is no assurance that operating margins will not erode in the future, which could substantially impact Frutarom’s business, operating results and financial condition.

Increased environmental, health and safety regulations or the loss of necessary environmental permits could adversely affect Frutarom’s operating results and financial condition.

Frutarom is subject to a variety of international and domestic health, safety and environmental statutes in the various countries in which it operates. In general, there is a trend towards increased regulation in the fields of Frutarom’s activities. This trend stems from, among other things, growing consumer sensitivity concerning the

 

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inclusion of flavor additives in food products and the fact that regulators perceive nutraceuticals, medical food and functional food products as having medicinal attributes. In some countries such products may be subjected to the same standards and regulations as applied to drugs or targeted regulation for these categories. In addition, regulators in different countries can change regulations applying to infant nutrition or clinical nutrition for the elderly in a way that might affect Frutarom’s sales in these categories. Frutarom has identified the markets for nutraceuticals, functional food, specialty fine ingredients for infant nutrition, especially infant formulas, and clinical nutrition for the elderly as important to its future growth. The subjecting of these markets to increased regulation could give rise to additional expenses which might have an adverse effect on Frutarom’s business, operating results and financial condition.

Companies such as Frutarom that operate in the flavor and fine ingredients industry make use of, manufacture, sell, and distribute substances that are sometimes considered hazardous and are therefore subject to extensive regulation concerning the storage, handling, manufacture, transport, use and disposal of such substances and their components and byproducts. Frutarom’s production and R&D activities in the various countries where it operates are subject to various regulations and standards relating to air emissions, sewage treatment and the use, handling and discharge of hazardous material as well as clean-up of existing environmental contamination. Any further tightening of such laws and regulations could have a substantial adverse effect on Frutarom’s business, operating results and financial condition.

In addition to covering its ongoing environmental compliance costs, Frutarom might also incur nonrecurring charges associated with remedial action needed to be taken at its production sites. As environment-related incidents cannot be foreseen with any certainty, the sums that Frutarom allocates or will allocate for such matters may turn out to be inadequate. Ongoing and nonrecurring environment-related expenses could each have a substantial adverse effect on Frutarom’s business, operating results and financial condition.

Frutarom is required to obtain various environmental permits concerning operations at its various production facilities and to meet the conditions set by these permits. The expansion of existing plants is also subject to securing necessary permits. Such permits might be unilaterally revoked or modified by the issuer, or might be for a limited amount of time. Any cancellation, modification and/or failure to renew or obtain a permit could have a significant adverse effect on Frutarom’s business, operating results and financial condition.

Failure to comply with environmental, health and safety laws and regulations may expose Frutarom to civil and criminal liability.

The laws and regulations concerning the environment, health and safety may subject Frutarom to civil and/or criminal liability for non-compliance or environmental pollution. Environmental, health and safety laws may include criminal sanctions (including substantial penalties) for violating them. Some environmental laws also include provisions imposing complete responsibility for the release of hazardous substances into the environment which could result in Frutarom becoming liable for clean-up efforts without any negligence or fault on its part. Other environmental laws impose liability jointly and severally, which could expose Frutarom to responsibility for cleaning up environmental pollution caused by others.

In addition, some environmental, health and safety laws are applied retroactively and could impose responsibility for acts done in the past even if such acts were carried out in accordance with the relevant legal provisions in force at the time. Criminal or civil liability under such laws may have significant adverse effects on Frutarom’s business, operating results and financial condition.

Frutarom may also become subjected to claims for personal injury or property damage arising from exposure to hazardous substances. Laws in the major countries where Frutarom operates permit legal proceedings to be instituted against it if personal injury or environmental contamination was ostensibly caused by activity at its production sites in these countries. Such legal proceedings could also be instituted by private individuals or non-governmental organizations.

 

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Fluctuations in prices of raw materials needed for producing Frutarom’s products may negatively impact its results of operations.

The price, quality and availability of the main raw materials that Frutarom uses, especially in the field of natural products, are subject to fluctuations arising from global supply and demand. Many raw materials used by Frutarom are agricultural products whose prices, quality and availability could be affected by, among other things, poor weather conditions. Frutarom does not normally conduct futures transactions in raw materials and is exposed to price fluctuations in the raw materials it uses according to changes in global trends for prices of these raw materials. In recent periods, there has been a rise in the prices of a number of principal raw materials used by Frutarom, and such trends may have a significant adverse effect on Frutarom’s business, operating results and financial condition.

The inability to obtain raw materials due to the loss of third party suppliers or unavailability of raw materials could impair Frutarom’s sales and adversely affect its operating results.

Frutarom is dependent on third parties for the supply of raw materials needed for manufacturing its products. Although Frutarom purchases raw materials from a very wide range of suppliers and no individual supplier accounted for more than 3% of its total raw material usage in 2017, and even though there is more than one supplier for most of the raw materials bought by Frutarom and they are usually readily available, there is no assurance that this will also continue to be the case in the future. Severe weather conditions may cause a significant shortage of natural raw materials used by Frutarom. A shortage of these raw materials could impair Frutarom’s sales for a certain period of time and adversely affect its operating results.

Product liability claims against Frutarom and potential damages under those claims could have significant adverse effects on Frutarom’s business, operating results and financial condition.

Frutarom is exposed to product liability risk, particularly due to the fact that it supplies flavors to the food and beverage, flavor and fragrance, functional food, pharma/nutraceutical and personal care industries. Should Frutarom be found responsible in a large claim of this type, its insurance coverage might be inadequate to cover damages and/or legal expenses. A lack of adequate insurance coverage could result in a significant adverse effect on Frutarom’s business, operating results and financial condition. Product liability claims brought against Frutarom could damage its reputation as well as put heavy demand on management’s time and efforts, and this could have significant adverse effects on Frutarom’s business regardless of the outcome of the claim.

The inability to integrate the businesses acquired by Frutarom during its recent growth period may lead to disruptions in its business and failure to capitalize on anticipated synergies.

A key element of Frutarom’s growth strategy has been growth through the acquisition of flavor and specialty fine ingredients manufacturers. In line with this strategy, Frutarom has made many strategic acquisitions of companies and business activities in recent years. The integration of acquired activities involves a number of risks, including possible adverse effects on Frutarom’s operating results, the loss of customers, the consuming of senior management’s time and attention, and the failure to retain key personnel including managers of the acquired activities, along with risks associated with unanticipated events in the integration of the operations, technologies, systems and services of the acquired business. In addition, Frutarom may be unable to capitalize on the anticipated synergies (including those aimed at cost savings) inherent in such acquisitions. Failure in successfully integrating its acquisitions could have adverse effects on Frutarom’s business, operating results and financial condition.

The rapid growth, as in recent years, in both Frutarom’s activities and its geographical spread requires effective management to ensure that the financial benefits, tapping of synergies and the economies of scale are achieved. An inability to adapt to the rapid growth could result in losses or acquisition costs that will not be recovered as quickly as anticipated, if at all. Such circumstances could have significant adverse effects on Frutarom’s business, its operating results and financial condition.

 

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The loss of skilled personnel, members of senior management or other key employees could negatively impact Frutarom’s ability to compete and implement its strategy.

Frutarom’s continued future success depends on its ability to attract and retain proficient flavorists (flavor developers), lab technicians and other skilled personnel. Frutarom operates in a highly specialized market where product quality is of critical importance and having skilled personnel is necessary for ensuring the supply of high quality products. If a number of such employees were to leave at the same time, Frutarom could encounter difficulties in finding replacements with equivalent experience and abilities, a situation which could impair Frutarom’s R&D capabilities. Furthermore, Frutarom’s continued success depends to a large extent on its senior management team. The loss of services from members of senior management or other key employees could have a negative impact on Frutarom’s results and its ability to implement its strategy. A failure to recruit and retain skilled personnel or members of senior management could have a significant adverse effect on Frutarom’s business, operating results and financial condition.

The inability to protect its intellectual property or the loss of exclusive use of its proprietary formulas to create flavors may have a significant adverse impact on Frutarom’s business, operating results and financial condition.

Frutarom’s business relies on intellectual property, mainly consisting of formulas used to create its flavors. Frutarom does not register these formulas but they are kept highly confidential and considered trade secrets and, as such, are accessible to just a very limited circle of people within Frutarom. Although Frutarom believes it is not significantly reliant on any individual intellectual property right, proprietary formula, patent or license, a breach of confidentiality with respect to the formulas or loss of access to them and/or the future expiration of intellectual property rights could have a significant adverse impact on Frutarom’s business, operating results and financial condition.

Frutarom relies, in part, on confidentiality agreements, ownership of intellectual property, and non-competition agreements with employees, vendors and third parties in order to protect its intellectual property. It is possible that these agreements will be breached and that Frutarom may lack an adequate remedy for any such breach. Disputes may arise concerning the ownership of intellectual property or the extent to which the confidentiality agreements remain in force. Furthermore, Frutarom’s trade secrets may become revealed to its competitors or developed independently by them, in which case Frutarom will not be able to enjoy exclusive use of some of its formulas or maintain confidentiality concerning its products.

 

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FORWARD-LOOKING STATEMENTS

Statements in this prospectus supplement and the documents incorporated by reference, which are not historical facts or information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management’s current assumptions, estimates and expectations and include statements concerning (i) our ability to achieve long-term sustainable growth and increase shareholder value, (ii) growth potential in the emerging markets, (iii) the anticipated impact of our acquisitions on our market position within key markets, (iv) our competitive position in the market and expected financial results in 2018, (v) expected savings from profit improvement initiatives, (vi) expected capital expenditures and cost pressures in 2018, (vii) the impact of the Tax Cuts and Jobs Act (the “Tax Act”) on the Company’s effective tax rate in 2018, (viii) the expected level of share repurchases under the Company’s share repurchase program, (ix) our ability to innovate and execute on specific consumer trends and demands, (x) timing of completion or relocation of our plants in China, (xi) expected increases in raw material costs in 2018, (xii) the impact of operational performance, cost reduction efforts and mix enhancement on margin improvement, and (xiii) the amount of expected pension contributions in 2018. 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 “expect,” “anticipate,” “believe,” “intend,” “outlook,” “may,” “estimate,” “should,” and “predict” and 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, those discussed in the “Risk Factors” section of this prospectus supplement and the following:

 

   

the impact of the Merger;

 

   

our ability to effectively compete in our market, and to successfully develop new products that appeal to our customers and consumers;

 

   

our ability to provide our customers with innovative, cost-effective products;

 

   

the impact of a disruption in our manufacturing operations;

 

   

the impact of the BASF Group supply chain disruption on the supply and price of a key ingredient in 2018;

 

   

our ability to implement our Vision 2020 strategy;

 

   

the impact of the recently-enacted Tax Act on our effective tax rate in 2018 and beyond;

 

   

our ability to successfully market to our expanding and decentralized Flavors customer base;

 

   

our ability to react in a timely manner to changes in the consumer products industry related to health and wellness;

 

   

our ability to establish and maintain collaborations, joint ventures or partnerships, which lead to the development or commercialization of products;

 

   

our ability to benefit from our investments and expansion in emerging markets;

 

   

the impact of international operations that are subject to regulatory, political, economic, currency exchange and other risks, including in countries such as Turkey and Argentina;

 

   

the impact of economic uncertainty which may adversely affect demand for consumer products using flavors and fragrances;

 

   

our ability to attract and retain talented employees;

 

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our ability to comply with, and the costs associated with compliance with, U.S. and foreign environmental protection laws;

 

   

our ability to realize the expected cost savings and efficiencies from our profitability improvement initiatives and the optimization of our manufacturing facilities;

 

   

volatility and increases in the price of raw materials, energy and transportation;

 

   

our ability to maintain the integrity of our raw materials, supply chain and finished goods, and comply with applicable regulations;

 

   

our ability to successfully manage our inventory and/or working capital balances;

 

   

the impact of violations of the U.S. Foreign Corrupt Practices Act or similar U.S. or foreign anti-bribery and anti-corruption laws and regulations in the markets in which we operate;

 

   

our ability to protect our intellectual property rights;

 

   

uncertainties regarding the outcome of, or funding requirements, related to litigation or settlement of pending litigation, uncertain tax positions or other contingencies;

 

   

the impact of any future impairment of our tangible or intangible long-lived assets;

 

   

the impact of changes in our tax rates, tax liabilities, the adoption of new United States or international tax legislation, or changes in existing tax laws;

 

   

our ability to successfully estimate the impact of certain accounting and tax matters; and

 

   

the potential adverse impact of Brexit on currency exchange rates, global economic conditions and cross-border agreements that affect our business.

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. For additional information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see “Risk Factors” in this prospectus supplement and the accompanying prospectus, as well as the risks described in the “Risk Factors” section of the Company’s most recent Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q and as may be included from time to time in our reports filed with the SEC.

The Company intends its forward-looking statements to speak only as of the time of such statements and does not undertake or plan to update or revise them as more information becomes available or to reflect changes in expectations, assumptions or results. The Company can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this prospectus supplement and the accompanying prospectus, or included in any of our periodic reports filed with the SEC and incorporated by reference into this prospectus supplement could materially and adversely impact our results of operations, financial condition and liquidity and our future financial results.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this Common Stock offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $1,456 million (or up to approximately $1,602 million if the underwriters exercise their option to purchase additional shares of our Common Stock). We intend to use the net proceeds from this offering, together with the net proceeds from the concurrent tangible equity units offering, the Debt Financings and cash on hand to finance the Merger and to pay related fees and expenses. If for any reason the Merger is not consummated, we intend to use the net proceeds from this offering for general corporate purposes. See “Summary—Recent Developments.”

Completion of this Common Stock offering is not contingent on completion of the concurrent tangible equity units offering, the Debt Financings or the Merger. The concurrent tangible equity units offering, the Debt Financings and the Merger are not contingent on the completion of this offering. Accordingly, even if the Merger is not consummated, our shares of Common Stock sold in this offering will remain outstanding, and we will not have any obligation to offer to repurchase any or all of the shares of Common Stock sold in this offering.

The following table outlines the sources and uses of funds for the Merger, assuming the underwriters do not exercise their respective options to purchase additional shares of Common Stock in this offering and additional tangible equity units in the concurrent tangible equity units offering. The table assumes that the Merger, this Common Stock offering, the concurrent tangible equity units offering and the Debt Financings are completed simultaneously, but this Common Stock offering, the concurrent tangible equity units offering and the Debt Financings are expected to occur before completion of the Merger. Amounts in the table are in millions of dollars and are estimated, and actual amounts may vary from the estimated amounts.

 

Sources of Funds

    

Uses of Funds

 
(in millions)  

Cash and cash equivalents

  $ 241      Merger consideration(2)   $ 6,189  

New Term Loan

    350      Merger and offering fees and expenses(3)     179  

New Notes(1)

    2,750      Repayment of outstanding indebtedness(4)(5)     1,047  

Tangible equity units offering(1)

    750      Breakage costs related to debt repayment(6)     40  

Common Stock offered hereby(1)

    1,500      General corporate purposes     40  

Equity consideration to Frutarom shareholders and option holders(2)

    1,904       
 

 

 

      

 

 

 

Total Sources

  $ 7,495      Total Uses   $ 7,495  
 

 

 

      

 

 

 

 

(1)

Before underwriting discounts and expenses and, with respect to the Common Stock offering and the tangible equity units offering, assumes no exercise of the underwriters’ respective options.

(2)

Based on the number of Frutarom’s outstanding ordinary shares and share-based awards as of June 30, 2018 and a price per share of our common stock of $127.72, which was the closing price of our common stock on the NYSE on September 5, 2018.

(3)

Includes estimated underwriting discounts and expenses of this offering, the concurrent tangible equity units offering and the Debt Financings and the Merger.

(4)

We intend to prepay in full our (i) $100 million in aggregate principal amount of 6.35% Series B Senior Notes due 2019, (ii) $50 million in aggregate principal amount of 6.50% Series C Senior Notes due 2022 and (iii) $100 million in aggregate principal amount of 6.79% Series D Senior Notes due 2027.

(5)

We intend to repay $797 million of outstanding Frutarom debt. The calculation of the amount of Frutarom’s debt to be repaid is as of June 30, 2018, and reflects the conversion into U.S. dollars of indebtedness denominated in foreign currencies (primarily euros) based on exchange rates as of June 30, 2018.

(6)

The make-whole amounts included are estimated amounts calculated based on relevant treasury yields as of August 15, 2018.

 

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CAPITALIZATION

The following sets forth our capitalization on a consolidated basis as of June 30, 2018:

 

   

on an actual basis;

 

   

on an as adjusted basis to reflect the issuance and sale of Common Stock offered hereby (but not the application of the proceeds therefrom), after deducting underwriting discounts and estimated offering expenses payable by us (assuming no exercise of the underwriters’ option to purchase additional shares of our Common Stock);

 

   

on an as further adjusted basis to reflect the concurrent issuance and sale of our tangible equity units after deducting the underwriting discounts and estimated offering expenses (but not the application of the proceeds therefrom), assuming no exercise of the underwriters’ option to purchase additional tangible equity units; and

 

   

on a pro forma as further adjusted basis to give further effect to (i) the Debt Financings and the payment of related fees and expenses and (ii) the Merger.

This table should be read in conjunction with the other sections of this prospectus supplement and our consolidated financial statements and related notes incorporated by reference in this prospectus supplement and the accompanying prospectus. See “Incorporation of Certain Information by Reference” in this prospectus supplement. In addition, investors should not place undue reliance on the as adjusted, as further adjusted or pro forma as further adjusted information included below because this offering is not contingent upon completion of any of the transactions reflected in the adjustments below.

 

(in thousands)   As of June 30, 2018  
  Actual     As Adjusted     As Further
Adjusted
    Pro Forma
As Further
Adjusted
 

Cash and cash equivalents

  $ 322,423     $ 1,778,673     $ 2,504,798     $ 296,947  
 

 

 

 

Commercial paper

                       
 

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt:

       

Credit facilities

    103,988       103,988       103,988       103,988  

Series B, C, D Senior Notes(1)

    249,776       249,776       249,776        

3.20% Senior Notes due 2023

    298,823       298,823       298,823       298,823  

1.75% Senior Notes due 2024

    573,514       573,514       573,514       573,514  

4.375% Senior Notes due 2047

    492,941       492,941       492,941       492,941  

Senior amortizing notes that are components of the tangible equity units being offered concurrently(2)

                122,778       122,778  

New Notes

                      2,732,116  

New Term Loan

                      347,429  

Other

    4,647       4,647       4,647       4,647  

Total debt(3)

    1,723,689       1,723,689       1,846,467       4,676,236  
 

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders’ equity:

       

Common Stock

    14,470       15,910       15,910       15,910  

Capital in excess of par value(4)

    167,432       1,622,242       2,225,589       3,428,168  

Retained earnings

    3,992,452       3,992,452       3,992,452       3,901,607  

Accumulated other comprehensive loss

    (692,498     (692,498     (692,498     (692,498

Treasury stock, at cost

    (1,732,001     (1,732,001     (1,732,001     (1,030,611

Total shareholders’ equity(5)

    1,749,855       3,206,105       3,809,452       5,622,576  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 3,473,544     $ 4,929,794     $ 5,655,919     $ 10,298,812  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

Includes (i) $100,000,000 aggregate principal amount 6.35% Series B Senior Notes due 2019, (ii) $50,000,000 aggregate principal amount 6.50% Series C Senior Notes due 2022 and (iii) $100,000,000 aggregate principal amount 6.79% Series D Senior Notes due 2027.

(2)

Each tangible equity unit will include an amortizing note. Approximately 17% of the stated amount of the tangible equity units is represented by the amortizing notes.

(3)

As of June 30, 2018, we had approximately $104.0 million outstanding under our revolving credit facility (including 90 million euro converted at an exchange rate of U.S. $1.1554 per euro as of June 30, 2018) and no borrowings outstanding under our commercial paper program.

(4)

Each tangible equity unit will include a purchase contract. We will account for the purchase contracts that are components of the tangible equity units as equity and expect to record the initial fair value of these purchase contracts, net of the underwriting discounts and offering expenses allocated to the purchase contracts, as additional paid-in capital. The exact amount we record as additional paid-in capital will not be determined until the determination of the final offering expenses of the tangible equity units offering. Approximately 83% of the stated amount of the tangible equity units will be represented by the purchase contracts and the underwriting discounts and offering expenses will be allocated to the purchase contracts.

(5)

Does not include noncontrolling interest.

 

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PRICE RANGE OF COMMON STOCK AND DIVIDENDS

Shares of our Common Stock are traded on the NYSE and Euronext Paris under the symbol “IFF.”

On September 12, 2018, the closing price of our Common Stock on the NYSE was $131.15 per share. As of September 6, 2018, we had approximately 1,668 shareholders of record holding shares of our Common Stock.

Although we have paid dividends in the past, all future declarations of dividends are subject to the final determination of our board of directors, in its discretion, based on a number of factors that it deems relevant, including our financial position, results of operations, available cash resources, cash requirements, applicable law and alternative uses of cash that our board of directors may conclude would be in the best interest of the IFF and our shareholders.

The table below shows the high and low closing prices for our Common Stock, and the cash dividends we paid per share for the quarterly periods indicated.

 

     High      Low      Dividends
declared per
share
 

Fiscal Year 2018:

        

First Quarter

   $ 156.87      $ 132.60      $ 0.69  

Second Quarter

     143.04        122.13        0.69  

Third Quarter (through September 12, 2018)

     134.45        122.95        0.73  

Fiscal Year 2017:

        

First Quarter

   $ 136.89      $ 115.26      $ 0.64  

Second Quarter

     139.73        128.98        0.64  

Third Quarter

     145.01        131.69        0.69  

Fourth Quarter

     155.44        144.47        0.69  

Fiscal Year 2016:

        

First Quarter

   $ 122.38      $ 97.24      $ 0.56  

Second Quarter

     131.30        114.65        0.56  

Third Quarter

     143.43        124.77        0.64  

Fourth Quarter

     143.64        116.64        0.64  

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On May 7, 2018, IFF, Frutarom and Merger Sub entered into a merger agreement that provides for the acquisition of Frutarom by IFF. Subject to the satisfaction or waiver of certain other closing conditions, IFF will acquire Frutarom through the merger of Merger Sub with and into Frutarom, with Frutarom surviving the merger and becoming a wholly owned subsidiary of IFF.

The following unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the merger and certain other adjustments listed below.

The unaudited pro forma condensed combined balance sheet as of June 30, 2018, and the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2018 and the year ended December 31, 2017, respectively, are presented herein. The unaudited pro forma condensed combined balance sheet combines the unaudited consolidated balance sheets of IFF and Frutarom as of June 30, 2018, and gives effect to the merger as if it occurred on June 30, 2018. The unaudited pro forma condensed combined statements of operations combine the historical results of IFF and Frutarom for the six months ended June 30, 2018, and the year ended December 31, 2017, and give effect to the merger as if it occurred on January 1, 2017. The historical financial information has been adjusted to give effect to pro forma adjustments that are (i) directly attributable to the merger, (ii) factually supportable, and (iii) with respect to the unaudited condensed combined statements of operations, expected to have a continuing impact on the combined entity’s condensed results.

The merger of IFF and Frutarom will be accounted for using the acquisition method of accounting as per the provisions of Accounting Standards Codification 805, “Business Combinations”, which we refer to as ASC 805, with IFF representing the accounting acquirer under this guidance. The unaudited pro forma condensed combined financial statements were prepared in accordance with Article 11 of Regulation S-X and primarily give effect to the merger adjustments, which include:

 

   

Adjustments to reconcile Frutarom’s historical audited and unaudited financial statements prepared in accordance with IFRS as issued by the IASB to U.S. GAAP;

 

   

Conforming accounting policies and presentation;

 

   

Application of the acquisition method of accounting in connection with the merger;

 

   

Adjustments to reflect repayment of certain existing debt facilities of Frutarom and IFF as well as financing arrangements entered into in connection with the merger; and

 

   

Effect of acquisition-related costs in connection with the merger.

The pro forma adjustments included in this document are subject to modification based on changes in interest rates, changes in share prices, the final determination of the fair value of the assets acquired and liabilities assumed, additional analysis, and additional information that may become available, which may cause the final adjustments to be materially different from the pro forma condensed combined financial statements presented below. Following the consummation of the merger, IFF management will perform a detailed review of Frutarom’s accounting policies in an effort to determine if differences in accounting policies require further reclassification of Frutarom’s results of operations or reclassification of assets or liabilities to conform to IFF’s accounting policies and classification. As a result, IFF may subsequently identify additional material differences in the accounting policies which could have a material impact on the unaudited pro forma combined financial information.

The unaudited pro forma condensed combined financial information presented is for informational purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the merger had been completed on the dates set forth above, nor is it indicative of future results or financial position of the combined company. Additionally, the final determination of the purchase price and the

 

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purchase price allocation, upon the completion of the merger, will be based on Frutarom’s net assets acquired as of that date and will depend on a number of factors that cannot be predicted with certainty at this time. The unaudited pro forma condensed combined financial information does not reflect any anticipated synergies or dis-synergies, operating efficiencies or cost savings that may result from the merger or potential divestitures that may occur prior to, or subsequent to, the completion of the merger or any acquisition and integration costs that may be incurred. The pro forma adjustments, which IFF believes are reasonable under the circumstances, are preliminary and are based upon available information and certain assumptions described in the accompanying notes to the unaudited pro forma condensed combined financial information. Actual results and valuations may differ materially from the assumptions within the accompanying unaudited pro forma condensed combined financial information. Any changes to IFF’s stock price, from September 5, 2018 through the date the merger is completed, will also change the purchase price, which may include the recording of a lower or higher amount of goodwill. The final adjustments may be materially different from the pro forma condensed combined financial statements presented in this document.

The unaudited pro forma condensed combined financial information should be read in conjunction with the notes to the unaudited pro forma condensed combined financial information, Frutarom’s audited financial statements for the year ended December 31, 2017 and Frutarom’s unaudited quarterly financial statements for the quarterly period ended June 30, 2018, as well as IFF’s consolidated financial statements and related notes thereto contained in its Annual Report on Form 10-K for the year ended December 31, 2017 and IFF’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018.

 

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Unaudited Pro Forma Condensed Combined Balance Sheet

As of June 30, 2018

 

(In thousands, except shares and per-share data)                                      
    Historical                                
    IFF
(US GAAP)
    FRUTAROM
(US GAAP)
    Purchase
Accounting
Adjustments
    Notes     Other
Pro Forma
Adjustments
    Notes     Total  

Assets

             

Current Assets:

             

Cash and Cash Equivalents

  $ 322,423     $ 119,807     $ (4,258,273     3     $ 4,113,214       6k     $ 297,171  

Trade receivables, net

    723,855       321,797                       1,045,652  

Inventory

    695,192       338,881       33,119       6c               1,067,192  

Prepaid expenses and other current assets

    285,110       27,949               (26,141     6h       286,918  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Current Assets

    2,026,580       808,434       (4,225,154       4,087,073         2,696,933  

Property, plant and equipment, net

    867,629       336,591             4               1,204,220  

Goodwill

    1,148,586       589,250       3,630,062       6b               5,367,898  

Other intangible assets, net

    391,426       442,647       2,027,353       4               2,861,426  

Deferred income taxes assets

    82,204       4,512                       86,716  

Other assets

    157,017       41,054                       198,071  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Assets

  $ 4,673,442     $ 2,222,488     $ 1,432,261       $ 4,087,073       $ 12,415,264  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

Current Liabilities:

             

Short term borrowings

    6,500       397,601               194,611       6f       598,712  

Accounts payable

    315,656       225,998                       541,654  

Dividends payable

    54,488             10,843       3               65,331  

Other current liabilities

    322,726       26,359       46,392       4       (36,792     6l       358,685  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Current Liabilities

    699,370       649,958       57,235         157,819         1,564,382  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Long-term debt

    1,717,189       399,833               1,960,993       6f       4,078,015  

Retirement liabilities

    226,221       33,690                       259,911  

Deferred income tax liabilities

          66,234       390,270       6d               456,504  

Other liabilities

    274,459       19,802       (2,186     4               292,075  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Other Liabilities

    2,217,869       519,559       388,084         1,960,993         5,086,505  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Redeemable Noncontrolling Interest

          131,398                       131,398  

Shareholders’ Equity:

             

Common Stock

    14,470       17,094       (17,094     6e       1,468       6f       15,938  

Capital in excess of par value

    167,432       116,132       1,086,447       6e       2,057,638       6f       3,427,649  

Treasury stock, at cost

    (1,732,001     (3,693     705,083       6e               (1,030,611

Other equity

    3,299,954       787,494       (787,494     6e       (90,845     6e       3,209,109  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Shareholders’ Equity

    1,749,855       917,027       986,942         1,968,261         5,622,085  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Noncontrolling interest

    6,348       4,546                       10,894  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Shareholders’ Equity including NCI

    1,756,203       921,573       986,942         1,968,261         5,632,979  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Liabilities and Shareholders’ Equity

  $ 4,673,442     $ 2,222,488     $ 1,432,261       $ 4,087,073       $ 12,415,264  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

See the accompanying “Notes to the Unaudited Pro Forma Condensed Combined Financial Information”, which are an integral part hereof. The pro forma adjustments are explained in the notes below.

 

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Unaudited Pro Forma Condensed Combined Statement of Operations

For the Six Months Ended June 30, 2018

 

(In thousands, except shares and per-share data)                  
     Historical                              
     IFF
(US GAAP)
    FRUTAROM
(US GAAP)
    Purchase
Accounting
Adjustments
    Notes    Other
Pro Forma
Adjustments
    Notes    Total  

Revenue:

                

Net sales

     1,850,944       786,110                         2,637,054  

Cost of goods sold

     1,046,419       466,928                         1,513,347  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Gross profit

     804,525       319,182                         1,123,707  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Expenses:

                

Research and development expenses

     153,244       30,770                         184,014  

Selling and administrative expenses

     300,051       141,640                (12,455   6h      429,236  

Restructuring and other charges, net

     1,903                               1,903  

Amortization of acquisition-related intangibles

     18,769       13,466       58,412     6a               90,647  

Gain on sales of fixed assets

     1,195       (691                       504  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total expenses

     475,162       185,185       58,412          (12,455        706,304  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Operating profit

     329,363       133,997       (58,412        12,455          417,403  

Other income (expense):

                        

Interest expense

     69,841       12,758                43,395     6f      125,994  

Other (income) expense, net

     (21,232     (950              (10,979   6g      (33,161
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total other (income) expense

     48,609       11,808                32,416          92,833  
  

 

 

   

 

 

   

 

 

      

 

 

      

Income before taxes

     280,754       122,189       (58,412        (19,961        324,570  

Taxes on income

     52,190       23,600       (11,215   6a      (4,385   6j      60,190  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net income (Including Noncontrolling Interests)

     228,564       98,589       (47,197        (15,576        264,380  

Less: noncontrolling interests

           3,204                         3,204  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net Income

     228,564       95,385       (47,197        (15,576        261,176  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net income per share—basic

     2.89       1.61               $ 2.34  

Net income per share—diluted

     2.87       1.63               $ 2.31  

Basic shares outstanding

     79,041       59,530                 111,564  

Diluted shares outstanding

     79,347       60,339                 113,045  

See the accompanying “Notes to the Unaudited Pro Forma Condensed Combined Financial Information”, which are an integral part hereof. The pro forma adjustments are explained in the notes below.

 

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Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2017

 

     IFF
(US GAAP)
    FRUTAROM
(US GAAP)
    Purchase
Accounting
Adjustments
    Notes    Other
Pro Forma
Adjustments
    Notes      Total  

Revenue:

                

Net sales

   $ 3,398,719     $ 1,362,396     $        $        $ 4,761,115  

Cost of goods sold

     1,919,718     $ 837,271                6,538       6i      $ 2,763,527  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Gross profit

     1,479,001       525,125                (6,538        1,997,588  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Expenses:

                

Research and development expenses

     286,026       43,644                9,443       6i        339,113  

Selling and administrative expenses

     557,311       246,332                12,833       6i        816,476  

Restructuring and other charges, net

     19,711       (340                       19,371  

Amortization of acquisition-related intangibles

     34,694       22,193       116,824     6a               173,711  

Gain on sales of fixed assets

     (184     1,934                         1,750  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total expenses

     897,558       313,763       116,824          22,276          1,350,421  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Operating profit

     581,443       211,362       (116,824        (28,814        647,167  

Other (income) expense:

                

Interest expense

     65,363       10,075                83,847       6f        159,285  

Other (income) expense, net

     (20,965     13,325                (28,814     6i        (36,454
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total other (income) expense

     44,398       23,400                55,033          122,831  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Income before taxes

     537,045       187,962       (116,824        (83,847        524,336  

Taxes on income

     241,380       35,105       (22,898   6a      (20,003     6j        233,584  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net income (Including Noncontrolling Interests)

     295,665       152,857       (93,926        (63,844        290,752  

Less: noncontrolling interests

           4,895                         4,895  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net Income

     295,665       147,962       (93,926        (63,844        285,857  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net income per share—basic

     3.73       2.49                 2.56  

Net income per share—diluted

     3.72       2.48                 2.54  

Basic shares outstanding

     79,070       59,342                 111,593  

Diluted shares outstanding

     79,370       59,632                 113,068  

See the accompanying “Notes to the Unaudited Pro Forma Condensed Combined Financial Information”, which are an integral part hereof. The pro forma adjustments are explained in the notes below.

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

(In US$ thousands, except share and per share data and as otherwise noted)

Note 1—Description of Business Combination

On May 7, 2018, International Flavors & Fragrances (“IFF”) entered into an Agreement and Plan of Merger (the “merger agreement”) with Frutarom Industries Ltd., a company organized under the laws of the State of Israel (“Frutarom”) and Icon Newco Ltd., a company organized under the laws of the State of Israel and a wholly owned subsidiary of IFF (“Merger Sub”). Pursuant to the merger agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into Frutarom (the “merger”), with Frutarom continuing as the surviving company in the merger and a wholly owned subsidiary of IFF.

At the completion of the merger, each ordinary share, par value Israeli New Shekel (to be referred as “NIS”) 1.00 per share, of Frutarom (the “Frutarom ordinary shares”) issued and outstanding immediately prior to the completion of the merger (other than Frutarom ordinary shares held by Frutarom as treasury stock (dormant shares) or held directly or indirectly by IFF, Merger Sub or any wholly owned subsidiary of Frutarom) will be converted into the right to receive (i) $71.19 in cash (the “cash consideration”) and (ii) 0.249 of a validly issued, fully paid and non-assessable share of common stock, par value $0.125 per share, of IFF (“IFF common stock”), with cash in lieu of fractional shares of IFF common stock otherwise issuable (such shares of IFF common stock and any such cash in lieu of fractional shares, together with the cash consideration, the “merger consideration”), in each case without interest and subject to applicable tax withholding.

At the completion of the merger, each Frutarom stock option and Frutarom restricted stock award that is outstanding and vested as of immediately prior to the completion of the merger, will be canceled in exchange for the right to receive the merger consideration in respect of each net share subject to such vested Frutarom stock option or Frutarom restricted stock award, less applicable tax withholding. For this purpose, “net share” means, with respect to a Frutarom stock option or Frutarom restricted stock award, the quotient of (i) the product of (A) the excess, if any, of the value of the merger consideration (calculated as specified in the merger agreement) over the exercise price or purchase price per Frutarom ordinary share (as applicable) subject to such Frutarom stock option or Frutarom restricted stock award, multiplied by (B) the number of Frutarom ordinary shares subject to such Frutarom stock option or Frutarom restricted stock award, divided by (ii) the value of the merger consideration.

The merger agreement provides for the Frutarom board of directors to declare a special dividend, on a per share basis, equal to the product of (a) 0.249 and (b) the aggregate per share value of IFF dividends with a record date after the date of the merger agreement and prior to the closing of the merger.

Note 2—Basis of Presentation

The accompanying unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X and was based on the historical financial statements of IFF and Frutarom as of and for the year ended December 31, 2017 and as of and for the six months ended June 30, 2018. IFF is deemed to be the accounting acquirer and the pro forma adjustments are preliminary and are based on estimates that are subject to change. The combined group will not be a “foreign private issuer” as defined in Rule 405 under the Securities Act and Rule 3b-4(c) under the Exchange Act, accordingly the pro forma information of the combined group is prepared in accordance with U.S. GAAP.

The unaudited pro forma condensed combined statements of operations were prepared using:

 

   

the historical unaudited consolidated statements of operations and comprehensive income of IFF for the six months ended June 30, 2018;

 

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the historical audited consolidated statements of operations and comprehensive income of IFF for the year ended December 31, 2017;

 

   

the historical unaudited condensed consolidated statements of operations of Frutarom for the six months ended June 30, 2018; and

 

   

the historical audited consolidated income statement of Frutarom for the year ended December 31, 2017.

IFF’s historical audited and unaudited financial statements were prepared in accordance with U.S. GAAP and presented in thousands of U.S. dollars. Frutarom’s historical audited and unaudited financial statements were prepared in accordance with IFRS as issued by the IASB and presented in thousands of U.S. dollars. Certain reclassifications were made to align Frutarom’s financial statement presentation with that of IFF (see Note 5).

Frutarom’s historical audited and unaudited financial statements were reconciled to U.S. GAAP. In addition, a preliminary review of IFRS to U.S. GAAP differences and related accounting policies has been completed based on information made available to date (see Note 5 for further information). However, following the consummation of the merger, IFF management will conduct a detailed review. As a result of that review, IFF management may identify differences that, when finalized, could have a material impact on the unaudited pro forma condensed combined financial information.

The unaudited pro forma condensed combined statements of operations also include certain purchase accounting adjustments, including items expected to have a continuing impact on the condensed combined results.

Note 3—Estimated Purchase Price

Pursuant to the merger, shareholders of Frutarom will receive $71.19 in cash and 0.249 shares of IFF’s common stock for each Frutarom ordinary share held prior to the merger. If the aggregate number of shares of IFF common stock to be issued pursuant to the merger agreement would exceed 19.9% of the issued and outstanding shares of IFF common stock immediately prior to the entry into the merger agreement, rounded down to the nearest whole share, the exchange ratio will be reduced by the minimum extent necessary such that the foregoing clause is no longer true, and the cash component of the merger consideration will also be increased accordingly.

 

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The following table summarizes the components of the preliminary estimated purchase price:

 

(In USD thousands, except share data and exchange ratio)            

Estimated Frutarom’s shares outstanding(i)

        59,654,657  

Cash consideration per share(ii)

        71.19  
     

 

 

 

Total cash paid to shareholders of Frutarom

      $ 4,246,815  

Estimated cash paid to vested stock option holders(iii)

        11,458  

Estimated accrual for unvested stock option holders(iv)

        16,392  

Estimated closing dividend payable(v)

        10,843  
     

 

 

 

Estimated cash portion of purchase price

   A    $ 4,285,508  
     

 

 

 

Estimated Frutarom’s shares outstanding

        59,654,657  

Exchange ratio(vi)

        0.249  

Total common shares of IFF to be issued(viii)

        14,854,010  

IFF’s share price(vii)

        127.72  
     

 

 

 

Total equity consideration paid to shareholders of Frutarom

        1,897,154  

Estimated equity consideration paid to vested stock Frutarom option holders(iii)

        6,815  
     

 

 

 

Estimated equity portion of purchase price

   B    $ 1,903,969  
     

 

 

 

Total estimated consideration to be paid

   A+B    $ 6,189,477  
     

 

 

 

 

(i)

Number of shares outstanding as of June 30, 2018.

(ii)

Cash consideration per share as per the merger agreement.

(iii)

Estimated cash and equity consideration payable to the vested Frutarom stock option holders on a diluted basis

(iv)

Estimated pro rata portion of the unvested Frutarom stock options attributable to pre-combination services. The pro forma adjustment has been recorded in other current liabilities.

(v)

Estimated dividend payable to Frutarom shareholders prior to closing considering the exchange ratio, as set forth in the merger agreement, and IFF dividend rate. IFF’s current dividend rate ($0.73 per share) has been considered for the purpose of this computation. The amount is subject to change if IFF’s dividend rate changes prior to closing. The pro forma adjustment has been recorded in dividends payable.

(vi)

Exchange ratio as set forth in the merger agreement.

(vii)

Closing price of IFF’s common stock on the New York Stock Exchange on September 5, 2018.

(viii)

Common shares of IFF to be issued to Frutarom as merger consideration will be issued out of treasury shares of IFF (See note 6(f))

The final estimated merger consideration could significantly differ from the amounts presented in the unaudited pro forma condensed combined financial information due to movements in IFF’s common stock price up to the closing date of the merger. A sensitivity analysis related to the fluctuation in the IFF’s common stock price was performed to assess the impact a hypothetical change of 10% on the closing price of IFF’s common stock on September 5, 2018, would have on the estimated merger consideration and goodwill as of the closing date. The following table shows the change in stock price, estimated merger consideration and goodwill:

 

     Purchase Price      Estimated Goodwill  

As presented in the pro forma combined financial statements

     6,189,477        4,219,312  

10% increase in common stock price

     6,380,771        4,410,606  

10% decrease in common stock price

     5,998,183        4,028,018  

 

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Note 4—Preliminary Purchase Price Allocation

Under the acquisition method of accounting, Frutarom’s assets and liabilities will be recorded at fair value at the date of the completion of the merger and combined with the historical carrying amounts of the assets and liabilities of IFF. In the unaudited pro forma condensed combined balance sheet, IFF’s cost to acquire Frutarom has been allocated to the assets acquired, liabilities assumed and goodwill based upon management’s preliminary estimate of what their respective fair values would be as if the merger closed on June 30, 2018. Accordingly, the unaudited pro forma condensed combined financial information includes a preliminary allocation of the purchase price based on assumptions and estimates that, while considered reasonable under the circumstances, are subject to changes, which may be material.

IFF has not completed a full, detailed valuation analysis necessary to determine the fair values of Frutarom’s identifiable assets to be acquired, liabilities to be assumed and redeemable and non-redeemable noncontrolling interest. The preliminary calculation of assets acquired and liabilities assumed performed for the purposes of these unaudited pro forma condensed combined financial statements was primarily limited to the identification and calculation of preliminary values for the intangible assets, property and equipment, inventory, deferred taxes and contingent consideration. The calculations necessary to estimate the fair values of the assets acquired and liabilities assumed have been performed based on publicly available benchmarking information as well as a variety of other assumptions, including market participant assumptions, as there are limitations on the type of information that can be exchanged between IFF and Frutarom at this time. Where applicable, the benchmark information was corroborated with an income approach methodology such as the relief from royalty or multi-period excess earnings method. IFF will continue to refine its identification and valuation of assets to be acquired and the liabilities to be assumed as further information becomes available.

The estimated values of the assets acquired, liabilities assumed and redeemable and non-redeemable noncontrolling interest will remain preliminary until after closing of the merger, at which time IFF will determine the fair values of assets acquired and liabilities assumed. The final determination of the purchase price allocation is anticipated to be completed as soon as practicable after completion of the merger and will be based on the fair values of the assets acquired and liabilities assumed as of the merger closing date. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma condensed combined financial statements.

The following is a preliminary estimate of the assets to be acquired and the liabilities to be assumed by IFF in the merger, reconciled to the estimate of total consideration expected to be transferred (in USD thousands):

 

     Frutarom’s
U.S. GAAP
     Fair Value
Adjustments
     Fair value  
     (Note 5)                

Purchase Consideration

           6,189,477  

Identifiable net assets:

        

Inventories

     338,881        33,119        372,000  

Property, plant and equipment

     336,591               336,591  

Identifiable intangible assets

     442,647        2,027,353        2,470,000  

Deferred tax assets

     4,512               4,512  

All other assets (excluding goodwill)

     510,607               510,607  

Existing contingent consideration

     (42,186      2,186        (40,000

Transaction bonus

            (30,000      (30,000

Deferred tax liabilities

     (66,234      (390,270      (456,504

All other liabilities

     (1,061,098             (1,061,098
  

 

 

    

 

 

    

 

 

 

Total identifiable net assets

     463,720        1,642,388        2,106,108  

Redeemable Noncontrolling interest

     (131,397             (131,397

Noncontrolling interest

     (4,546             (4,546

Goodwill

     589,250        3,630,062        4,219,312  
  

 

 

    

 

 

    

 

 

 

Total

   $ 917,027      $ 5,272,450      $ 6,189,477  
  

 

 

    

 

 

    

 

 

 

 

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The amount allocated to identifiable intangible assets has been attributed to the following assets (in thousands):

 

     Estimated Useful
Life
   Amount  

Product Formulas

   10 years    $ 340,000  

Trade name

   20 years      130,000  

Customer relationships

   20 years      2,000,000  
     

 

 

 

Total identifiable intangible assets

      $ 2,470,000  
     

 

 

 

These intangible assets will be amortized over the estimated useful lives on a straight line basis. IFF believes that it represents the pattern in which economic benefits will be consumed.

In addition, pursuant to the merger agreement, the Frutarom board has the right to grant a transaction bonus to its CEO and selected employees before the merger is consummated to the extent of up to $20 million each. The transaction bonus to the CEO will be payable immediately prior to the closing of the merger. As of the date of this filing, management believes that the Frutarom board will approve the transaction bonus. The transaction bonus to employees is payable in two installments (i) 50% at closing and (ii) 50% after the completion of one year of service (subject to the terms of the merger agreement). IFF has determined that $30 million is a pre-merger expense to be accrued by Frutarom due to the fact that the transaction bonus was entered into by or on behalf of Frutarom. See table below (in USD thousands):

 

     Pre-combination
expense
     Post-combination
expense
 

CEO

   $ 20,000         

Selected employees

     10,000        10,000  
  

 

 

    

 

 

 

Total bonus

   $ 30,000      $ 10,000  
  

 

 

    

 

 

 

Accordingly, pro forma condensed combined balance sheet has been adjusted to reflect an adjustment of $30,000 for transaction bonus payable by Frutarom, declared before the merger is consummated. This amount together with $16,392 for the accrual for unvested Frutarom stock options attributable to pre-combination services (see Note 3) has been shown as an adjustment to other current liabilities.

Note 5—Adjustments to Frutarom’s Historical Financial Statements to Conform to U.S. GAAP

Frutarom’s consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB, which differs in certain material respects from U.S. GAAP.

The unaudited U.S. GAAP information includes a statement of financial position and statements of income of Frutarom derived from the historical consolidated financial statements as of and for the six months ended June 30, 2018 and the year ended December 31, 2017, prepared in accordance with IFRS as issued by the IASB. This balance sheet as of June 30, 2018 and statements of operations for the year ended December 31, 2017 and for the six months ended June 30, 2018 have been adjusted to reflect Frutarom’s consolidated statement of financial position and statements of profit or loss on a U.S. GAAP basis.

 

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Certain balances presented in the historical Frutarom’s financial statements included within the unaudited pro forma condensed combined financial information have been reclassified to conform the presentation to that of IFF as indicated in the tables as below:

UNAUDITED FRUTAROM US GAAP BALANCE SHEET

As of June 30, 2018

 

     Frutarom
(IFRS)
    Reclassification
Adjustments
    Notes      IFRS to
U.S. GAAP
Adjustments
    Notes      FRUTAROM
(U.S. GAAP)
 

Assets

              

Current Assets:

              

Cash and Cash Equivalents

   $ 119,807                       $ 119,807  

Accounts receivable:

                      

Trade

     296,906       (296,906     5a                  

Other

     24,891       (24,891     5a                  

Trade receivables, net

       321,797       5a                 321,797  

Prepaid expenses and advances to suppliers

     27,949       (27,949     5b                  

Prepaid expenses and other current assets

       27,949       5b                 27,949  

Inventory

     338,881                         338,881  
  

 

 

   

 

 

      

 

 

      

 

 

 
     808,434                         808,434  
  

 

 

   

 

 

      

 

 

      

 

 

 

Non-Current Assets:

              

Property, plant and equipment

     369,517                (32,926     5o        336,591  

Intangible assets

     1,031,897       (589,250     5c                 442,647  

Goodwill

           589,250       5c                 589,250  

Investment in associates and available for sale assets

     27,481       (27,481     5d                  

Deferred income tax assets

     4,512                         4,512  

Others

     13,573       (13,573     5d                  

Other assets

       41,054       5d                 41,054  
  

 

 

   

 

 

      

 

 

      

 

 

 
     1,446,980                (32,926        1,414,054  
  

 

 

   

 

 

      

 

 

      

 

 

 

Total Assets

   $ 2,255,414              $ (32,926      $ 2,222,488  
  

 

 

   

 

 

      

 

 

      

 

 

 

Liabilities and equity

              

Current liabilities

              

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

     397,601       (397,601     5e                  

Short-term borrowings

           397,601       5e                 397,601  

Accounts payable:

                      

Trade

     104,565       (104,565     5f              

Other

     156,365       (156,365     5g                  

Accounts Payable

           225,998       5f, 5g                 225,998  

Leases

     7,757                (7,757     5o         

Dividends payable

                              

Other current liabilities

           34,932       5g        (8,572     5n        26,360  
  

 

 

   

 

 

      

 

 

      

 

 

 
     666,288                (16,329        649,959  
  

 

 

   

 

 

      

 

 

      

 

 

 

NON-CURRENT LIABILITIES:

              

Long-term loans, net of current maturities

     399,833                         399,833  

Retirement benefit obligations, net

     33,690                         33,690  

Deferred income tax liabilities

     66,234                     66,234  

Leases

     25,322                (25,322     5o         

Liability for shareholders of subsidiaries and other

     142,627       (19,802     5h        (122,825     5n         

Other liabilities

           19,802       5h                 19,802  
  

 

 

   

 

 

      

 

 

      

 

 

 
     667,706                (148,147        519,559  
  

 

 

   

 

 

      

 

 

      

 

 

 

TOTAL LIABILITIES

     1,333,994                (164,476        1,169,518  

Redeemable Noncontrolling Interest

            131,397       5n        131,397  

Equity attributable to owners of the parent:

              

Ordinary shares

     17,094                         17,094  

Other capital surplus

     116,132       (116,132     5i                  

Capital in excess of par value

       116,132       5i                 116,132  

Translation differences

     (85,299     85,299       5j                  

Retained earnings

     872,640       (872,640     5j                  

Less-cost of company shares held by the company

     (3,693     3,693       5j                  

Treasury stock, at cost

           (3,693     5j                 (3,693

Other equity

       787,341       5j        153       5n        787,494  
  

 

 

   

 

 

      

 

 

      

 

 

 

Total Shareholders’ Equity

     916,874                153          917,027  

Noncontrolling interest

     4,546                         4,546  
  

 

 

   

 

 

      

 

 

      

 

 

 

TOTAL EQUITY

   $ 921,420              $ 153        $ 921,573  
  

 

 

   

 

 

      

 

 

      

 

 

 

TOTAL EQUITY AND LIABILITIES

   $ 2,255,414              $ (32,926      $ 2,222,488  
  

 

 

   

 

 

      

 

 

      

 

 

 

 

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UNAUDITED FRUTAROM US GAAP STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2018

 

     Frutarom
IFRS
    Reclassification
Adjustments
    Notes      IFRS to U.S. GAAP
Adjustments
    Notes      Frutarom
U.S. GAAP
 

Revenue:

              

Net sales

     786,110                         786,110  

Cost of Sales

     466,928       (466,928     5k                  

Cost of goods sold

           466,928       5k                 466,928  
  

 

 

   

 

 

      

 

 

      

 

 

 

Gross profit

     319,182                         319,182  

Selling, marketing, research and development expenses—net

     134,697       (134,697     5l                  

Research and development expenses

           30,770       5l                 30,770  

Selling and administrative expenses

           141,640       5l                 141,640  

General and administrative expenses

     51,179       (51,179     5l                  

Amortization of acquisition-related intangibles

           13,466       5l                 13,466  

Other expenses—net

     (315     315       5l                  

Gain on sales of fixed assets

           (691     5l                 (691

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

     (1,326     1,326       5l                  
  

 

 

   

 

 

      

 

 

      

 

 

 

Income From Operations

     134,947       (950                 133,997  

Financial Expenses—net

     12,758       (12,758     5m                  

Interest Expense

           12,758       5m                 12,758  

Other (income) expense, net

       (950     5l                 (950
  

 

 

   

 

 

      

 

 

      

 

 

 

Income Before Taxes on Net Income

     122,189                         122,189  

Income Tax

     23,600                         23,600  
  

 

 

   

 

 

      

 

 

      

 

 

 

Net income (Including Noncontrolling Interests)

     98,589                         98,589  

Less: noncontrolling interests

     756                2,449       5n        3,205  
  

 

 

   

 

 

      

 

 

      

 

 

 

Net Income

     97,833                (2,449        95,384  
  

 

 

   

 

 

      

 

 

      

 

 

 

Net income per share—basic

     1.64                 1.61  

Net income per share—diluted

     1.63                 1.63  

 

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UNAUDITED FRUTAROM US GAAP STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2017

 

     Frutarom
IFRS
    Reclassification
Adjustments
    Notes    IFRS to U.S. GAAP
Adjustments
    Notes    Frutarom
U.S. GAAP
 

Revenue:

              

Net sales

   $ 1,362,396     $        $        $ 1,362,396  

Cost of Sales

     837,271       (837,271   5k                

Cost of goods sold

           837,271     5k               837,271  
  

 

 

   

 

 

      

 

 

      

 

 

 

Gross profit

     525,125                         525,125  

Selling, marketing, research and development expenses—net

     220,014       (220,014   5l                

Research and development expenses

           43,644     5l               43,644  

Selling and administrative expenses

           246,332     5l               246,332  

General and administrative expenses

     92,155       (92,155   5l                

Amortization of acquisition-related intangibles

           22,193     5l           22,193  

Restructuring and other charges, net

           (340   5l           (340

Other expenses—net

     3,392       (3,392   5l                

Gain on sales of fixed assets

           1,934     5l               1,934  

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

     (1,402     1,402     5l                
  

 

 

   

 

 

      

 

 

      

 

 

 

Income From Operations

     210,966       396                   211,362  

Financial Expenses—net

     24,606       (24,606   5m                

Interest Expense

           10,075     5m               10,075  

Other (income) expense, net

       14,927     5l, 5m      (1,602   5p      13,325  
  

 

 

   

 

 

      

 

 

      

 

 

 

Income Before Taxes on Net Income

     186,360                1,602          187,962  
  

 

 

   

 

 

      

 

 

      

 

 

 

Income Tax

     34,797                308     5p      35,105  
  

 

 

   

 

 

      

 

 

      

 

 

 

Net income (Including Noncontrolling Interests)

     151,563                1,294          152,857  

Less: noncontrolling interests

     1,884                3,011     5n      4,895  
  

 

 

   

 

 

      

 

 

      

 

 

 

Net Income

   $ 149,679     $        $ (1,717      $ 147,962  
  

 

 

   

 

 

      

 

 

      

 

 

 

Net income per share—basic

   $ 2.52               $ 2.49  

Net income per share—diluted

   $ 2.51               $ 2.48  

 

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Adjustments included in the column “Reclassification Adjustments” are as follows:

Represents certain reclassifications of historical Frutarom’s financial statement line items to conform to the expected financial statement line items of the combined group including:

Balance sheet items:

 

a)

Accounts receivable: Trade and Other have been reclassified to Trade receivables, net;

 

b)

Prepaid expenses and advances to suppliers have been reclassified to Prepaid expenses and other current assets;

 

c)

The portion of intangible assets that relates to goodwill was classified separately as goodwill;

 

d)

Investment in associates and available for sale assets and Others have been reclassified to Other assets;

 

e)

Short term bank credit and loans and current maturities of long-term loans have been reclassified to Short-term borrowings;

 

f)

Accounts payable: Trade has been reclassified to Accounts Payable;

 

g)

Accounts payable: Other has been reclassified as follows: (i) an amount of $34,932 that represents $8,572 of Put-Option liability and $26,360 of the current portion of Contingent consideration, has been reclassified to Other current liabilities, and (ii) the remaining balance of $121,433 has been reclassified to Accounts Payable. See Note 5(h) for the reclassification for the long-term portion of the contingent consideration.

 

h)

The portion of liability for shareholders of subsidiaries and other that relates to long term portion of contingent consideration has been reclassified to Other liabilities;

 

i)

Other capital surplus has been reclassified to Capital in excess of par value; and

 

j)

Translation differences and Retained earnings have been condensed into other equity. Cost of company shares held by Frutarom have been reclassified to Treasury stock, at cost.

Statement of income items:

 

k)

Cost of Sales have been reclassified to Cost of goods sold;

 

l)

Selling, marketing, research and development expenses—net, General and administrative expenses, Other expenses—net and Group’s share of earnings of companies accounted for at equity have been reclassified in accordance with IFF’s presentation as below:

 

Frutarom’s Presentation    Year ended
Dec 31, 2017
    Period ended
June 30, 2018
   

IFF’s Presentation

   Year ended
Dec 31, 2017
    Period ended
June 30, 2018
 

Selling, marketing, research and development expenses—net

   $ 220,014     $ 134,697    

Research and development expenses

   $ 43,644     $ 30,770  

General and administrative expenses

     92,155       51,179    

Selling and administrative expenses

     246,332       141,640  

Other expenses—net

     3,392       (315  

Restructuring and other charges, net

     (340      

Group’s share of earnings of companies accounted

     (1,402     (1,326  

Amortization of acquisition-related intangibles

     22,193       13,466  
      

Losses (Gain) on sales of fixed assets

     1,934       (691
      

Other (income) expense, net

     396       (950
  

 

 

   

 

 

      

 

 

   

 

 

 
   $ 314,159     $ 184,235        $ 314,159     $ 184,235  
  

 

 

   

 

 

      

 

 

   

 

 

 

 

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m)

The Portion of Financial Expenses – net that relates to expenses on debt have been reclassified to Interest Expense and the remaining portion that relates to foreign exchange gain or loss has been reclassified to Other (income) expenses, net.

Adjustments included in the column “IFRS to U.S. GAAP Adjustments” are as follows:

The following adjustments have been made to convert Frutarom’s historical balance sheet as of June 30, 2018 and statement of operations for the six months ended June 30, 2018 and the year ended December 31, 2017 to U.S. GAAP for purposes of the pro forma presentation:

 

n)

Reflects an adjustment to reclassify put option liability as redeemable noncontrolling interest to mezzanine equity. As part of several acquisitions effected by Frutarom, the noncontrolling interest holders of the acquired entities were granted an option to sell (“Put option”) their respective interests to Frutarom. In accordance with IFRS, Frutarom recognized a liability for such put options. Under U.S. GAAP, IFF determined the put options cannot be separated from the noncontrolling interest and the combination of a noncontrolling interest and the redemption feature require classification of such noncontrolling interest as a redeemable noncontrolling interest in the combined balance sheet. Further, those noncontrolling interests which are not currently redeemable but are probable to become redeemable are measured using the present value of the redemption value as of the earliest redemption date and the noncontrolling interests which are currently redeemable are measured at the maximum redemption amount. IFF has reviewed the computation of liabilities for put option under IFRS and determined that the amounts to be recorded for redeemable non-controlling interest under U.S. GAAP would be materially the same as the amount of such liabilities for put option recorded under IFRS. Accordingly, the unaudited pro forma condensed combined balance sheet as at June 30, 2018 was adjusted to reclassify the current and non-current portion of liability for put option that represented redeemable portion of noncontrolling interest as mezzanine equity which is presented between total liabilities and shareholders’ equity. In addition, as a result of the reclassification to mezzanine equity, a portion of the profit has been allocated to the relevant NCI in accordance with U.S. GAAP.

 

o)

For the year ended December 31, 2017, Frutarom accounted for the lease arrangements entered into under IAS 17—Leases (“IAS 17”). Frutarom has elected to early adopt IFRS 16—Leases (“IFRS 16”) issued by the IASB, as of January 1, 2018, which requires entities to recognize a lease liability that reflects future lease payments and a “right-of-use” asset in all lease arrangements, with no distinction between capital/finance and operating leases subject to an exemption of certain short term leases or leases of low value assets. As a result of the early adoption of IFRS 16, Frutarom has recorded its operating leases as a “right to use” asset along with a corresponding lease liability in its historical balance sheet for the six months ended June 30, 2018. Regarding all leases, Frutarom applied the transitional provisions under IFRS 16 such that it initially recognized a liability at the commencement date at an amount equal to the present value of the lease payments during the lease, discounted using the effective interest rate as of that date, and concurrently recognized a right-of-use asset at an amount identical to the liability. As a result, adoption of the standard had no impact on equity and retained earnings of Frutarom as of initial application. IFF will adopt ASC 842 beginning January 1, 2019. Accordingly, IFF will reverse changes made by Frutarom under IFRS 16 and leases are accounted for under ASC 840 for the six months ending June 30, 2018.

 

p)

Expected return on plan assets—Under IFRS, companies calculate a net interest cost (income) by applying the discount rate to the net pension benefit obligation or asset, while U.S. GAAP requires companies to calculate a separate return on plan assets using an estimated long-term rate of return on plan assets. The interest cost on the pension benefit obligation is generally the same under both IFRS and U.S. GAAP.

 

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The following is a summary of the calculation of the pro forma statement of operations adjustment of $1.6 million for the year ended December 31, 2017 relating to the expected return on plan assets. This adjustment is due to the different asset return rates used for IFRS versus U.S. GAAP and has been calculated using the following methodology:

 

Plan Asset

   $  28,699  

Rate Differential:

  

Expected rate on plan assets

     6.63

Weighted average discount rate

     1.04

Difference in rates

     5.58

Pro forma adjustment

   $ 1,602  

The expected long-term rate of return on pension plan assets was estimated based on the plan’s investment strategy and asset allocation, historical capital market performance, and historical performance.

The tax impact of the pro forma statement of operations adjustment was estimated using Frutarom’s statutory tax rate in the jurisdictions expected to be impacted.

An adjustment for the six months ended June 30, 2018 has not been calculated since management believes that the adjustment is not material.

No pro forma balance sheet adjustment is required because the amounts recorded for pension assets and obligations will not change materially as a result of purchase accounting.

Note 6—Pro Forma Adjustments

Adjustments included in the unaudited pro forma condensed combined balance sheet are represented by the following:

 

a)

Represents the adjustments to recognize additional amortization expense related to the increased basis of intangible assets (see Note 4), which have been recorded at estimated fair value on a pro forma basis and will be amortized over the estimated useful lives on a straight line basis. As part of the preliminary valuation analysis, IFF identified intangible assets related to product formulas, trade name and customer relationships.

The following table summarizes the estimated fair values of Frutarom’s identifiable intangible assets and their estimated useful lives and uses a straight line method of amortization (in USD thousands):

 

     Estimated Fair
Value
     Estimated Useful
Life (in Years)
     For the Six
Months Ended
June 30, 2018
    For the Year
Ended December 31
2017
 

Intangible assets

          

Product formulas

     340,000        10        17,000       34,000  

Trade name

     130,000        20        3,250       6,500  

Customer relationships

     2,000,000        20        50,000       100,000  
  

 

 

       

 

 

   

 

 

 
     2,470,000           70,250       140,500  
  

 

 

         

Less: Historical amortization expense

           (11,838     (23,676
        

 

 

   

 

 

 

Pro forma adjustment

         $ 58,412     $ 116,824  
        

 

 

   

 

 

 

The estimated tax impact of the fair market value adjustments on the amortization expense is reflected in the statements of operations using the weighted average statutory tax rate of the jurisdictions expected to be impacted.

 

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A 10% change in the valuation of definite lived intangible assets would cause a corresponding increase or decrease in the balance of goodwill and would also cause a corresponding increase or decrease in the annual amortization expense of approximately $14,050.

 

b)

The pro forma condensed combined balance sheet has been adjusted to reflect the elimination of Frutarom’s historical goodwill of $589,250 and to record goodwill resulting from the merger of $4,219,312. Recorded goodwill is calculated as the difference between the fair value of the purchase price paid and the preliminary values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed. See Note 4 for the calculation of the amount of preliminary goodwill recognized in connection with the merger.

 

c)

The pro forma condensed combined balance sheet has been adjusted to step up Frutarom’s inventory to a fair value of approximately $372,000, an increase of $33,119 from the carrying value. This fair value estimate of inventory is preliminary and is determined based on the assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). This preliminary fair value estimate could include assets that are not intended to be used, may be sold or are intended to be used in a manner other than their best use. The final fair value determination for inventories may differ from this preliminary determination. No adjustment to the unaudited pro forma condensed combined statement of operations has been recorded since the step up of inventory does not have a continuing impact on the combined company.

 

d)

The pro forma condensed balance sheet has been adjusted to include the adjustment to deferred tax liabilities, on a preliminary basis, of $390,270 resulting from the pro forma fair value adjustments for inventory, intangible assets (excluding goodwill which is not tax deductible), and liabilities utilizing a weighted average statutory rate for the jurisdictions expected to be impacted. Because the tax rate used for these pro forma financial statements is an estimate, it will likely vary from the actual rate in periods subsequent to the completion of the merger and those differences may be material.

 

e)

The pro forma condensed combined balance sheet has been adjusted to reflect an adjustment of $917,027 to eliminate Frutarom’s historical shareholders’ equity, which represents the historical book value of Frutarom’s net assets, as a result of the merger. The pro forma adjustment to equity also reflects the issue of IFF shares to Frutarom out of the treasury shares of the Company as part of the purchase consideration (Note 3). The cost to reissue treasury stock is determined using the average cost method. See table below for more details:

 

     Reversal of
Frutarom’s
equity
     Issue of IFF’s shares
to Frutarom
     Pro forma
adjustment
 

Common Stock

     (17,094             (17,094

Capital in excess of par value

     (116,132      1,202,579        1,086,447  

Treasury stock, at cost

     3,693        701,390        705,083  

Other equity

     (787,494             (787,494
  

 

 

    

 

 

    

 

 

 

Total

   $ (917,027    $ 1,903,969      $ 986,942  
  

 

 

    

 

 

    

 

 

 

 

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In addition, other pro forma adjustments to other equity include the following adjustments:

 

     Amount      Tax
impact
     Pro forma
adjustment
 

Adjustment related to extinguishment of IFF’s debt (Note 6f)

     39,838        (8,382      31,456  

Adjustment related to acquisition related cost (Note 6h)

     38,047               38,047  

Adjustment related to bridge finance commitment fee (Note 6h)

     29,224        (6,838      22,386  

Adjustment related to fair valuation of derivatives (Note 6g)

     (1,322      278        (1,044
     

 

 

    

 

 

 

Total

      $ (14,942    $ 90,845  
     

 

 

    

 

 

 

 

f)

IFF expects to finance the merger with a combination of up to $3.1 billion of new debt, cash on hand and up to $2.1 billion in equity. The financing is expected to consist of (i) issuing new par value debt in the form of notes of approximately $2,750 million at a weighted average interest rate of 3.3% per annum with maturities ranging from 2 – 30 years, a portion of which will be denominated in currencies other than the U.S. dollar (ii) obtaining a new term loan facility of up to $350 million (iii) issuing new Tangible Equity Units (TEU) of approximately $750 million, securities consisting of (a) 3-year prepaid common stock purchase contract of $623 million and (b) 3-year amortizing bond of $127 million at an effective interest rate of 5.71%, and (iv) issuance of new common shares for $1,500 million.

Based on the expected structure of the TEUs, IFF expects the purchase contract component of the TEUs to meet equity classification which has been reflected as such in the unaudited pro forma condensed combined balance sheet. The classification of the TEU will be subject to detailed assessment once finalized and a different conclusion may result in a material impact on these unaudited pro forma condensed combined financial information.

IFF has entered into a debt commitment letter with Morgan Stanley Senior Funding, Inc. to obtain a 364-day bridge facility of up to $5,450 million to the extent IFF does not receive $5,450 million of net cash proceeds from the financing arrangements discussed above. This bridge facility is not expected to be utilized, and thus the fee of the bridge facility financing totaling $39.8 million is not included in the calculation of pro forma interest expense but will be considered an acquisition related cost (see Note 6(g)). On June 6, 2018, IFF entered into a term loan credit agreement to replace a portion of the bridge facility, reducing the amount of the bridge facility by $350 million. If IFF is not able to consummate the financing discussed above, and instead must utilize the bridge facility to fund the acquisition, the adjustment to annual interest expense is expected to be approximately $104.6 million for the six months ended June 30, 2018 and $209.1 million for the year ended December 31, 2017 respectively. Financial expenses related to the amortization of the fee for bridge financing recognized by IFF during the six months ended June 30, 2018, amounting to $10.6 million, have been removed for pro forma purposes, since it does not have a continuing impact (see Note 6(h)). In addition, the accrual created by the Company for the bridge financing fee of $12 million as of June 30, 2018 has been reversed to reflect the total impact of estimated bridge facility financing to cash and retained earnings on pro forma balance sheet (see Note 6(l)).

IFF intends to retire all of Frutarom’s existing debt utilizing funds raised by the expected financing arrangements above. Additionally, in connection with the merger, IFF intends to prepay in full IFF’s current outstanding senior secured notes due 2019-2027. Pursuant to this, IFF will incur certain pre-payment penalties and swap unwind costs. These transactions will be treated as an extinguishment of debt, with a loss of $39.8 million associated with the pre-payment of senior secured notes due 2019-2027 along with swap unwind fee. The loss on extinguishment is reflected in the unaudited pro forma balance sheet as a reduction of retained earnings and a reduction of cash as it will be expensed by IFF. It is not reflected in the pro forma statement of operations due to its nonrecurring nature.

 

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The following pro forma adjustments have been recorded in the pro forma condensed combined balance sheet in relation to the new debt (in USD thousands):

 

     As of
June 30,
2018
 

Term loan

     350,000  

Senior notes

     2,750,000  

Debt portion of TEUs

     127,322  

Debt issuance costs

     (24,508

Extinguishment of Frutarom’s existing debt

     (797,434

Repayment of IFF’s existing debt

     (249,776
  

 

 

 

Pro forma adjustment

   $ 2,155,604  
  

 

 

 

Allocated to:

  

Short-term borrowings

     194,611  

Long-term debt

     1,960,993  
  

 

 

 

Pro forma adjustment

   $ 2,155,604  
  

 

 

 

The following pro forma adjustments have been recorded in the pro forma condensed combined balance sheet in relation to the issuance of equity (in USD thousands):

 

     Issue of
common stock
     Equity
portion of
Tangible
equity units
     Pro forma
adjustment
 

Common Stock

     1,468               1,468  

Capital in excess of par value

     1,454,782        602,856        2,057,638  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,456,250      $ 602,856      $ 2,059,106  
  

 

 

    

 

 

    

 

 

 

The following pro forma adjustments have been recorded in the pro forma condensed combined statements of operations (in USD thousands):

 

     Six Months
Ended June 30,
2018
     Year Ended
December 31,
2017
 

Interest expense on Term Loan

     4,528        12,679  

Interest expense TEU notes

     2,268        6,216  

Interest on Senior Notes

     41,057        91,465  

Frutarom Interest Expense

     (10,600      (10,075

Retirement of IFF Senior Notes

     (8,219      (16,438

Reversal of fee recognized for bridge financing

     (10,576       

Reversal of mark-to-market gain recognized foreign currency forward (note 6g)

     24,937         
  

 

 

    

 

 

 

Total pro forma adjustment

   $ 43,395      $ 83,847  
  

 

 

    

 

 

 

The weighted-average interest rate on the new term loan, new senior notes and amortizing bond (TEU) as of the issuance is expected to be 3.60%. The actual financing and terms of the financing will be subject to market conditions. A 1/8% change in interest rates on the debt to be incurred as part of the merger would result in a change in interest expense of $5.1 million annually.

 

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g)

IFF entered into deal contingent foreign currency forward contract and interest rate swaps. The deal contingent foreign currency forward serves as an economic hedge of the Euro denominated portion of the senior notes to be issued, while the deal contingent interest rate swaps serve as an economic hedge of the underlying interest rate of the USD denominated senior notes. Upon securing the permanent financing, IFF intends to net settle these derivatives with the financial institutions by making or receiving payment. The foreign currency forward and interest rate swaps have not been considered to be designated as a hedge for the purposes of pro forma financial information. As of September 5, 2018, the foreign currency forward had a fair value of a gain of approximately $18.6 million and the interest rate swaps had a fair value of a loss of approximately $17.3 million. For the purpose of the unaudited pro forma financial statements, recognition of these derivatives have been considered an event that is directly attributable to the merger, however, since these are deal contingent, there is no continuing impact. Accordingly, the pro forma balance sheet has been adjusted to reflect the fair value of these derivatives as of September 5, 2018, as if these derivatives were settled on the said date increasing cash and retained earnings. No future impact on pro forma statement of operations is considered due its non-recurring nature. However, during the six months ended June 30, 2018, IFF recognized $24,937 of mark-to-market gain related to interest rate swaps under Financing expenses – net, and $10,979 of mark-to-market loss relates to foreign current forward under Other (income) expenses, net. The unrealized gain/loss recognized by IFF on mark-to-market valuation of these derivatives during the six months ended June 30, 2018, has been eliminated from the pro forma statement of operations, since it does not have a continuing impact. The pro forma adjustments were tax effected using the worldwide weighted average statutory tax rate in the jurisdictions to which the adjustments are expected to relate.

 

h)

The pro forma condensed combined balance sheet has been adjusted to reflect an adjustment of $93,802 for estimated acquisition-related costs consisting of bridge facility financing fees of $39,800 and professional, legal and other acquisition-related fees of $50,502. Pursuant to the requirements for the preparation of pro forma financial information under Article 11 of Regulation S-X, these acquisition-related costs are not included in the pro forma condensed combined statements of operations, since these costs are nonrecurring. During the six months ended June 30, 2018, IFF recognized $12,455 as acquisition-related expenses. The Company paid $2,605 of these expenses and $9,850 are accrued as liability in the balance sheet as of June 30, 2018. The remaining costs expected to be paid in the future are reflected in the unaudited pro forma condensed combined balance sheet as a decrease to cash and cash equivalents, with the related tax benefits reflected as a decrease in other current liabilities and the after tax impact presented as a decrease to retained earnings. The acquisition-related costs recognized by IFF during the six months ended June 30, 2018, have been eliminated from the pro forma statement of operation, since it does not have a continuing impact. The adjustment related to acquisition-related cost in the pro forma financial statements is summarized below:

 

     Total
estimated
cost
     Paid until
June 30,
2018
    Pro Forma
adjustment
to cash
     Expense
recognized during
Six Months ended
June 30, 2018
    Pro forma
adjustment to
retained
earnings
 

Bridge financing fee

     39,800        (24,716     15,084        (10,576     29,224  

Acquisition-related cost

     50,502        (2,605     47,897        (12,455     38,047  
       

 

 

      

 

 

 
        $ 62,981        $ 67,271  
       

 

 

      

 

 

 

 

i)

The pro forma condensed combined statement of operation has been adjusted for the impact of the adoption of ASU 2017-07—Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, to present the non-service components of periodic pension cost to “Other (income) expense, net” in the pro forma condensed combined statements of operations.

 

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j)

The estimated tax impact of the interest expense adjustments have been reflected in the pro forma condensed combined statement of operation using the weighted average statutory tax rate of the jurisdictions expected to be impacted. Because the tax rate used for these pro forma financial statements is an estimate, it will likely vary from the actual rate in periods subsequent to the completion of the business combination and those differences may be material.

 

k)

The following table summarizes the pro forma adjustments to cash and cash equivalent (in USD thousands):

 

     Pro Forma
adjustment
 

Proceeds from debt financing (Note 6f)

     2,155,605  

Proceeds from equity financing (Note 6f)

     2,059,106  

Prepayment penalty and loss-unwind fee (Note 6f)

     (39,838

Payment of Acquisition-related cost (Note 6h)

     (62,981

Net payment upon settlement of derivatives (Note 6g)

     1,322  
  

 

 

 

Total

   $ 4,113,214  
  

 

 

 

 

l)

The following table summarizes the pro forma adjustments to other current liabilities (in USD thousands):

 

     Pro Forma
adjustment
 

Tax impact of adjustment posted (Note 6e)

     14,942  

Reversal of accrual created for bridge financing fee (Note 6f)

     12,000  

Reversal of accrual created for acquisition related cost (Note 6h)

     9,850  
  

 

 

 

Total

   $ 36,792  
  

 

 

 

Note 7—Pro Forma Earnings Per Share

The following table presents the calculation of pro forma combined basic and diluted net loss per share of common stock, after giving effect to:

 

  (a)

the preliminary estimated number of shares of IFF common stock to be issued as part of purchase consideration calculated using the exchange ratio;

 

  (b)

the preliminary estimated number of shares of IFF common stock to be issued in order to finance the acquisition; and

 

  (c)

the dilutive impact of equity portion of the tangible equity units

 

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for the year ended December 31, 2017 and the six months ended June 30, 2018 (in USD thousands, except per share amounts):

 

     Year Ended
December 31, 2017
     Six Months Ended
June 30, 2018
 

Pro forma net profit attributable to stockholders

     285,857        261,176  

Weighted average number of IFF shares outstanding—Basic

     79,070        79,041  

IFF shares issued to Frutarom as part of purchase consideration (Note 3)

     14,907        14,907  

Fresh equity of common stock to finance the acquisition (Note 6f)

     11,744        11,744  

Common stock issuable upon conversion of Tangible equity units

     5,872        5,872  
  

 

 

    

 

 

 

Pro forma weighted average number shares outstanding—Basic

     111,593        111,564  

Weighted average number of IFF shares outstanding—Diluted

     79,370        79,347  

IFF shares issued to Frutarom as part of purchase consideration (Note 3)

     14,907        14,907  

Fresh equity of common stock to finance the acquisition (Note 6f)

     11,744        11,744  

Diluted common stock issuable upon conversion of Tangible equity units

     7,047        7,047  
  

 

 

    

 

 

 
     113,068        113,045  

Pro forma net income per share of common stock—Basic

     2.56        2.34  

Pro forma net income per share of common stock—Diluted

     2.54        2.31  

 

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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of the material U.S. federal income and, to a limited extent, estate tax consequences of the purchase, ownership and disposition of our Common Stock. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and final, temporary and proposed regulations, rulings, administrative pronouncements and judicial decisions thereunder as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in U.S. federal income and estate tax consequences different from those discussed below. This summary deals only with holders that will hold our Common Stock as a capital asset. This summary does not describe all of the income or estate tax consequences that may be relevant to a holder in light of the holder’s particular circumstances or to holders subject to special rules, such as certain financial institutions; insurance companies; dealers or traders subject to a mark-to-market method of tax accounting with respect to our Common Stock; persons holding our Common Stock as part of a hedge, “straddle,” integrated transaction or similar transaction; U.S. holders (as defined below) whose functional currency is not the U.S. dollar; U.S. expatriates; non-resident alien individuals who are present in the United States for more than 182 days in a taxable year; any person that actually or constructively owns 10% or more of the total combined voting power of our stock entitled to vote; partnerships or other entities or arrangements classified as partnerships for U.S. federal income tax purposes; or tax exempt entities.

This summary addresses only U.S. federal income and, to a limited extent, estate tax consequences and does not address consequences arising under foreign, state, local or other tax laws, the alternative minimum tax or the Medicare tax on net investment income. Prospective investors should consult their own tax advisors in determining the tax consequences to them of holding our Common Stock under such tax laws, as well as the application to their particular situation of the U.S. federal income and estate tax considerations discussed below.

U.S. Holders

The following discussion applies only to a U.S. holder of our Common Stock. As used herein, a “U.S. holder” is a beneficial owner of our Common Stock that is a citizen or resident of the United States or a U.S. domestic corporation or that otherwise will be subject to U.S. federal income taxation on a net income basis in respect of the Common Stock.

Distributions on Common Stock. If we make a distribution of cash or property to a U.S. holder in respect of a share of our Common Stock (other than certain pro rata distributions of common shares), the distribution generally will be treated first as a dividend to the extent of our current and accumulated earnings and profits as determined under U.S. federal income tax principles, then as a tax-free return of capital to the extent of the U.S. holder’s tax basis in the share, and thereafter as capital gain from the sale or exchange of the share as described below under “—Sale or Other Taxable Disposition of Common Stock.” Dividends received by a non-corporate U.S. holder will be eligible to be taxed at reduced rates if the U.S. holder meets certain holding period and other applicable requirements. Dividends received by a corporate U.S. holder will be eligible for the dividends-received deduction if the U.S. holder meets certain holding period and other applicable requirements.

Sale or Other Taxable Disposition of Common Stock. A U.S. holder generally will recognize capital gain or loss upon the sale, exchange or other disposition of a share of our Common Stock equal to the difference between the amount realized and the U.S. holder’s adjusted tax basis in the Common Stock. Any such capital gain or loss will be long-term capital gain or loss if the U.S. holder’s holding period for the share exceeds one year. Long-term capital gains of a non-corporate U.S. holder are generally eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.

Non-U.S. Holders

The following discussion applies only to non-U.S. holders. A “non-U.S. holder” is a beneficial owner of our Common Stock that is an individual, corporation, estate, or trust that is not a U.S. holder.

 

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Distributions on Common Stock. Any distribution on our Common Stock generally will be treated as a dividend, return of capital or capital gain (as described above under “—U.S. Holders—Distributions on Common Stock”). Dividends paid (or deemed paid) to a non-U.S. holder of our Common Stock generally will be subject to withholding tax, currently at a 30% rate or a lower rate provided by an applicable income tax treaty. In order to obtain a reduced treaty rate of withholding, a non-U.S. holder will be required to provide a properly executed IRS Form W-8BEN or Form W-8BEN-E (or appropriate substitute form) to the applicable withholding agent certifying the non-U.S. holder’s entitlement to benefits under the relevant treaty.

Sale or Other Taxable Disposition of Common Stock. Subject to the discussions below under “—Information Reporting and Backup Withholding” and “—FATCA,” a non-U.S. holder generally will not be subject to U.S. federal income tax on gain recognized on a sale, exchange, or other disposition of our Common Stock, unless we are or have been a United States real property holding corporation for U.S. federal income tax purposes at any time within the five-year period preceding the disposition or the non-U.S. holder’s holding period, whichever period is shorter. We believe that we are not, and do not anticipate becoming, a United States real property holding corporation.

Information Reporting and Backup Withholding

Information returns will be filed with the IRS in connection with payments on our Common Stock made to certain U.S. holders and may be filed in connection with the proceeds from a sale or other disposition (or deemed disposition) of our Common Stock by such U.S. holders. In addition, certain U.S. holders may be subject to backup withholding in respect of payments on our Common Stock or in connection with the proceeds from a sale or other disposition (or deemed disposition) of our Common Stock if they do not provide their taxpayer identification numbers to the applicable withholding agent. Non-U.S. holders may be required to comply with applicable certification procedures to establish that they are not U.S. holders in order to avoid the application of such information reporting requirements and backup withholding. The amount of any backup withholding from a payment to a U.S. or non-U.S. holder will be allowed as a credit against the holder’s U.S. federal income tax liability and may entitle the holder to a refund, provided that the required information is timely furnished to the IRS.

FATCA

Under the U.S. tax rules known as the Foreign Account Tax Compliance Act (commonly known as FATCA), a holder of our Common Stock generally will be subject to 30% U.S. withholding tax on dividend payments made (or deemed made) on (and, after December 31, 2018, gross proceeds from the sale or other taxable disposition of) of our Common Stock if the holder (i) is, or holds our Common Stock through, a foreign financial institution that has not entered into an agreement with the U.S. government to report, on an annual basis, certain information regarding accounts with or interests in the institution held by certain United States persons and by certain non-U.S. entities that are wholly or partially owned by United States persons, or that has been designated as a “nonparticipating foreign financial institution” if it is subject to an intergovernmental agreement between the United States and a foreign country, or (ii) fails to provide certain documentation (usually an IRS Form W-8BEN or W-8BEN-E) containing information about its identity, its FATCA status, and if required, its direct and indirect U.S. owners. The adoption of, or implementation of, an intergovernmental agreement between the United States and an applicable foreign country, or future U.S. Treasury regulations, may modify these requirements. If any taxes were to be deducted or withheld from any payments in respect of our Common Stock as a result of a beneficial owner or intermediary’s failure to comply with the foregoing rules, no additional amounts will be paid to holders as a result of the deduction or withholding of such tax. Prospective investors should consult their own tax advisors on how these rules may apply to their investment in our Common Stock.

U.S. Federal Estate Tax

Shares of our Common Stock owned by a non-U.S. holder at the time of the non-U.S. holder’s death will be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise.

 

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UNDERWRITING

Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus supplement, the underwriters named below, for whom Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC are acting as joint book-running managers and representatives, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below:

 

Underwriters

   Number of Shares  

Morgan Stanley & Co. LLC

     5,234,689  

Citigroup Global Markets Inc.

     1,279,590  

J.P. Morgan Securities LLC

     1,279,590  

BNP Paribas Securities Corp.

     1,279,590  

BTIG, LLC

     465,306  

Citizens Capital Markets, Inc.

     465,306  

ING Financial Markets LLC

     465,306  

MUFG Securities Americas Inc.

     465,306  

Wells Fargo Securities, LLC

     465,306  

HSBC Securities (USA) Inc.

     116,326  
  

 

 

 

Total

     11,516,315  
  

 

 

 

The underwriters and the representatives are collectively referred to as the “underwriters” and the “representatives,” respectively. The underwriters are offering the shares of Common Stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of Common Stock offered by this prospectus supplement are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of Common Stock offered by this prospectus supplement if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ option to purchase additional shares described below.

The underwriters initially propose to offer part of the shares of Common Stock directly to the public at the offering price listed on the cover page of this prospectus supplement and part to certain dealers. After the initial offering of the shares of Common Stock, the offering price and other selling terms may from time to time be varied by the representatives.

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to 1,151,632 additional shares of Common Stock at the public offering price listed on the cover page of this prospectus supplement, less underwriting discounts. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of Common Stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of Common Stock listed next to the names of all underwriters in the preceding table.

The following table shows the per share and total public offering price, underwriting discounts, and proceeds before expenses to us. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional 1,151,632 shares of Common Stock.

 

            Total  
     Per
Share
     No Exercise      Full Exercise  

Public offering price

   $ 130.250000      $ 1,500,000,028.75      $ 1,650,000,096.75  

Underwriting discounts to be paid by us

   $ 3.712125      $ 42,750,000.82      $ 47,025,002.76  

Proceeds, before expenses, to us

   $ 126.537875      $ 1,457,250,027.93      $ 1,602,975,093.99  

 

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The estimated offering expenses payable by us, exclusive of the underwriting discounts, are approximately $1,000,000. We have agreed to reimburse the underwriters for expense relating to clearance of this offering with the Financial Industry Regulatory Authority.

Our Common Stock is listed on the NYSE and Euronext Paris under the symbol “IFF”.

We and all of our directors and officers have agreed that, without the prior written consent of the representatives on behalf of the underwriters, we and they will not, during the period ending 90 days after the date of this prospectus supplement (the “restricted period”): (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock or make any public announcement of its intention to enter into any of the foregoing transactions; (ii) file any registration statement with the SEC relating to the offering of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock; or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. In addition, we and each such person agrees that, without the prior written consent of the representatives on behalf of the underwriters, we or such other person will not, during the restricted period, make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock.

The restrictions described in the immediately preceding paragraph do not apply to:

 

   

the sale of shares of Common Stock in this offering or pursuant to the Merger Agreement;

 

   

transactions by any person other than us relating to shares of Common Stock or other securities acquired in open market transactions after the completion of this Common Stock offering; provided that no filing under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is required or voluntarily made in connection with subsequent sales of Common Stock or other securities acquired in such open market transactions;

 

   

transfers of shares of Common Stock or other securities as a bona fide gift or as a donation to a charitable organization; provided that the transferee will sign a substantially similar lock-up agreement; and provided further that no filing under Section 16(a) of the Exchange Act is required or voluntarily made;

 

   

distributions of shares of Common Stock (i) to a corporation, partnership, or limited liability company or other entity that controls or is controlled by, or is under common control with the signatory, or to any investment fund or other entity controlled or managed by the signatory, (ii) by operation of law, including by way of testate or intestate succession or in connection with any partition of community property or otherwise associated with a proceeding or settlement involving domestic relations or (iii) to any immediate family member, in each case in a transaction not involving a disposition for value; provided that in each case the transferee will sign a substantially similar lock-up agreement; and provided further that in the case of clauses (i) and (iii) no filing under Section 16(a) of the Exchange Act is required or voluntarily made,

 

   

the tangible equity units to be sold in the concurrent tangible equity unit offering and any shares of Common Stock issued pursuant to the terms of the purchase contracts;

 

   

the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares of common stock or sales of shares of Common Stock pursuant to a Rule 10b5-1 trading plan currently in effect; provided that (i) any such plan established after the date of the lock-up agreement does not provide for the transfer of Common Stock during the restricted period and (ii) to the extent a public announcement or filing under the Exchange Act, if any, is required or voluntarily made

 

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regarding the establishment of such plan, such announcement or filing shall include a statement to the effect that no transfer of common stock may be made under such plan during the restricted period;

 

   

the issuance by the Company of shares of Common Stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus supplement that is described in the registration statement to which this prospectus supplement relates; provided that the restrictions described above shall apply to Common Stock issued upon such exercise; and

 

   

dispositions or transfers of shares of Common Stock solely on a “cashless” or “net exercise” basis (i) to the Company upon a vesting event of the Company’s restricted stock units to cover tax withholding obligations of the securityholder in connection with such vesting or (ii) relating to options to purchase Common Stock under a plan described in the registration statement to which this prospectus supplement relates that are scheduled to expire during the restricted period; provided that, in each case, to the extent a filing under the Exchange Act or public announcement, if any, is made regarding a reduction in beneficial ownership of shares of Common Stock during the restricted period, the securityholder shall include a statement in such report to the effect that such disposition was made pursuant to the foregoing circumstances; and provided further that no voluntary filing under the Exchange Act or other voluntary public announcement reporting a reduction in beneficial ownership of shares of Common Stock during the restricted period shall be made by any party in connection with such disposition.

The representatives, in their sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time.

In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the option. The underwriters can close out a covered short sale by exercising the option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the option. The underwriters may also sell shares in excess of the option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time.

We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that underwriters may be required to make in respect of those liabilities.

A prospectus supplement in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The representatives may agree to allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet distributions on the same basis as other allocations.

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging. financing and brokerage activities.

 

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Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses. In addition, Morgan Stanley & Co. LLC has acted as our financial adviser in connection with the Merger. In connection with the Merger, we entered into a term loan credit agreement with an affiliate of Morgan Stanley & Co. LLC, as administrative agent, and the lenders party thereto, including affiliates of Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, pursuant to which the lenders committed to provide, subject to certain conditions, a senior unsecured term loan facility in an original aggregate principal amount of up to $350 million, maturing three years after the funding date thereunder. Also in connection with the Merger, we and certain of our subsidiaries entered into Amendment No. 2 to the Credit Agreement with Citibank, N.A. as administrative agent, and the lenders party thereto, including affiliates of Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, which amended and restated the Credit Agreement, dated as of November 9, 2011, amended and restated as of December 2, 2016 and amended as of May 21, 2018 among us, certain of our subsidiaries, the lenders party thereto, and Citibank, N.A. as administrative agent (as so amended and restated, the “Revolving Credit Agreement”). The Revolving Credit Agreement, among other things, provides a five-year $1.0 billion senior unsecured revolving loan credit facility. Some of the underwriters and their respective affiliates are or will be lenders under the senior unsecured term loan facility, the senior unsecured revolving loan credit facility and the Bridge Facility, and funding of the Merger with the proceeds from this Common Stock offering, the concurrent tangible equity units offering and the Debt Financing will result in the reduction of the lenders’ obligations under the Bridge Facility.

In addition, in the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve our securities and instruments. The underwriters and their respective affiliates may also make investment recommendations or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long or short positions in such securities and instruments.

Selling Restrictions

Canada

The shares of our Common Stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares of our common stock must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

 

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European Economic Area

The shares of Common Stock are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in the European Economic Area (“EEA”). For these purposes, a retail investor means a person who is one (or more) of: (i) a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID II”); or (ii) a customer within the meaning of Directive 2002/92/EC (as amended, the “Insurance Mediation Directive”), where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II; or (iii) not a qualified investor as defined in Directive 2003/71/EC (as amended, the “Prospectus Directive”). Consequently no key information document required by Regulation (EU) No 1286/2014 (as amended, the “PRIIPs Regulation”) for offering or selling the shares of Common Stock or otherwise making them available to retail investors in the EEA has been prepared and therefore offering or selling the shares of Common Stock or otherwise making them available to any retail investor in the EEA may be unlawful under the PRIIPs Regulation. This prospectus supplement and the accompanying prospectus have been prepared on the basis that any offer of shares of Common Stock in any Member State of the EEA will be made pursuant to an exemption under the Prospectus Directive from the requirement to publish a prospectus for offers of shares of Common Stock. This prospectus supplement and the accompanying prospectus are not a prospectus for the purposes of the Prospectus Directive.

United Kingdom

In addition, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at: (i) in the United Kingdom, persons having professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”), and/or persons falling within Article 49(2)(a) to (d) of the Order; (ii) persons who are outside the United Kingdom; and (iii) any other persons to whom it may otherwise lawfully be distributed (all such persons together being referred to as “relevant persons”). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to, and will be engaged in only with, relevant persons.

Israel

This prospectus does not constitute a prospectus under the Israeli Securities Law, 5728-1968, and has not been filed with or approved by the Israel Securities Authority. In Israel, this prospectus is being distributed only to, and is directed only at, qualified investors listed in the first addendum, or the Addendum, to the Israeli Securities Law. Qualified investors will be required to submit written confirmation that they fall within the scope of the Addendum.

 

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LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock offered under this prospectus supplement will be passed upon for us by Cleary Gottlieb Steen & Hamilton, LLP, New York, New York. Certain legal matters relating to the offering will be passed upon for the underwriters by Davis Polk & Wardwell LLP, New York, New York.

EXPERTS

The financial statements of International Flavors & Fragrances Inc. and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Report on Internal Control over Financial Reporting) incorporated in this prospectus supplement by reference to International Flavors & Fragrances Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017 have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The financial statements of Frutarom Industries Ltd. as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017 included in this prospectus supplement have been so included in reliance on the report of Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited, independent accountants, given on the authority of said firm as experts in auditing and accounting.

 

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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

We are “incorporating by reference” into this prospectus supplement specific documents that we file with the SEC, which means that we can disclose important information to you by referring you to those documents that are considered part of this prospectus supplement. Information that we file subsequently with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below, and any future documents that we file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act until we sell all of the securities offered by this prospectus supplement.

We incorporate by reference into this prospectus supplement the following documents filed by us with the SEC, other than information furnished pursuant to Item 2.02 or Item 7.01 of Form 8-K, each of which should be considered an important part of this prospectus supplement:

 

Commission Filing (File No. 001-04858)

  

Period Covered or Date of Filing

Annual Report on Form 10-K (including the portions of our Proxy Statement on Schedule 14A for our 2018 Annual Meeting of Shareholders filed with the Commission on March 23, 2018 that are incorporated herein by reference)

   Year Ended December 31, 2017

Quarterly Reports on Form 10-Q

   Quarter Ended March 31, 2018 and June 30, 2018

Current Reports on Form 8-K

   May 3, 2018, May 7, 2018, May 9, 2018, May 24, 2018, June 8, 2018, August 3, 2018, August 27, 2018 and September 10, 2018

All subsequent documents filed by us under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until we sell all of the securities offered by this prospectus supplement

  

We will provide to each person to whom a prospectus supplement and the accompanying prospectus is delivered, a copy of any or all of the information that has been incorporated by reference in this prospectus supplement and the accompanying prospectus but not delivered with this prospectus supplement and the accompanying prospectus.

You may request a copy of each of our filings at no cost, by writing or telephoning us at the following address or telephone number:

International Flavors & Fragrances Inc.

Attention: Investor Relations

521 West 57th Street

New York, NY 10019

Phone: (212) 765-5500

 

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FRUTAROM INDUSTRIES LTD. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Auditors

     F-2  

Consolidated Financial Statements

  

Consolidated Statement of Financial Position as of December  31, 2017 and 2016

     F-3  

Consolidated Income Statement and Statement of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015

     F-6  

Consolidated Statement of Changes in Equity for the Years Ended December 31, 2017, 2016 and 2015

     F-7  

Consolidated Statement of Cash Flows for the Years Ended December  31, 2017, 2016 and 2015

     F-10  

Notes to the Consolidated Financial Statements

     F-12  

Condensed Consolidated Interim Financial Information

  

Condensed Consolidated Statements of Financial Position as of June  30, 2018 and 2017

     F-77  

Condensed Consolidated Statements of Income for the Six and Three Month Period Ended June 30, 2018 and 2017

     F-79  

Condensed Consolidated Statements of Comprehensive Income for the Six and Three Month Period Ended June 30, 2018 and 2017

     F-80  

Condensed Consolidated Statements of Changes in Equity for the Six and Three Month Period Ended June 30, 2018 and 2017

     F-81  

Condensed Consolidated Statements of Cash Flows for the Six and Three Month Period Ended June 30, 2018 and 2017

     F-86  

Explanatory Notes to the Condensed Consolidated Financial information

     F-88  

 

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LOGO

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

FRUTAROM INDUSTRIES LTD.

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

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

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

Auditors’ Responsibility

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

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

Opinion

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

 

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

 

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

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

 

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FRUTAROM INDUSTRIES LTD.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

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

Assets

        

CURRENT ASSETS:

     

Cash and cash equivalents

     19        118,214        113,528  

Accounts receivable:

     16        

Trade

        248,043        200,106  

Other

        23,647        29,888  

Prepaid expenses and advances to suppliers

        21,265        20,248  

Inventory

     17        308,891        260,951  
     

 

 

    

 

 

 
        720,060        624,721  
     

 

 

    

 

 

 

NON-CURRENT ASSETS:

        

Property, plant and equipment

     7        312,876        268,820  

Intangible assets

     2f.8        829,226        657,781  

Investment in associates and available for sale assets

     15        77,541        27,976  

Deferred income tax assets

     13d        3,886        3,477  

Other

     18        3,599        2,686  
     

 

 

    

 

 

 
        1,227,128        960,740  
     

 

 

    

 

 

 

Total assets

        1,947,188        1,585,461  
     

 

 

    

 

 

 

 

 

 

  )
  Dr. John Farber   )
  Chairman of the Board  
 

 

  )
  Ori Yehudai   )
  President and CEO  
 

 

  )
  Alon Granot   )
  Executive Vice President and CFO  

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

 

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FRUTAROM INDUSTRIES LTD.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

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

Liabilities and shareholders’ equity

       

CURRENT LIABILITIES:

       

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

     9        372,135       234,204  

Accounts payable:

       

Trade

     20a        98,813       81,630  

Other

     20b        140,560       109,607  

Put option liability for the shareholders of a Subsidiary

     5a.1              40,350  
     

 

 

   

 

 

 
        611,508       465,791  
     

 

 

   

 

 

 

NON-CURRENT LIABILITIES:

       

Long-term loans net of current maturities

     9        262,151       299,576  

Retirement benefit obligations, net

     10        34,006       35,041  

Deferred income tax liabilities

     13d        58,306       50,147  

Liability for shareholders of a subsidiaries and other

     3        102,304       70,302  
     

 

 

   

 

 

 
        456,767       455,066  
     

 

 

   

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES

     11       
     

 

 

   

 

 

 

TOTAL LIABILITIES

        1,068,275       920,857  
     

 

 

   

 

 

 

EQUITY:

     12       

Equity attributable to owners of the parent:

       

Ordinary shares

        17,086       16,997  

Other capital surplus

        120,288       114,396  

Translation differences

     2c        (45,187     (109,043

Retained earnings

        783,029       637,868  

Less—cost of Company shares held by the company

        (3,409     (3,765
     

 

 

   

 

 

 

NON-CONTROLLING INTERESTS

        7,106       8,151  
     

 

 

   

 

 

 

TOTAL EQUITY

        878,913       664,604  
     

 

 

   

 

 

 

TOTAL EQUITY AND LIABILITIES

        1,947,188       1,585,461  
     

 

 

   

 

 

 

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

 

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FRUTAROM INDUSTRIES LTD.

CONSOLIDATED INCOME STATEMENT

 

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

SALES

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

COST OF SALES

     21a        837,271        709,488        534,737  
     

 

 

    

 

 

    

 

 

 

GROSS PROFIT

        525,125        437,553        338,059  

Selling, marketing, research and development expenses—net

     21b        220,014        196,001        141,237  

General and administrative expenses

     21c        92,155        81,637        63,742  

Other expenses—net

     21d        3,392        11,772        2,826  

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

     15        1,402        1,113         
     

 

 

    

 

 

    

 

 

 

INCOME FROM OPERATIONS

        210,966        149,256        130,254  

FINANCIAL EXPENSES—net

     21e        24,606        12,841        12,197  
     

 

 

    

 

 

    

 

 

 

INCOME BEFORE TAXES ON INCOME

        186,360        136,415        118,057  

INCOME TAX

     13e        34,797        25,346        21,972  
     

 

 

    

 

 

    

 

 

 

NET INCOME FOR THE YEAR

        151,563        111,069        96,085  
     

 

 

    

 

 

    

 

 

 

PROFIT ATTRIBUTED TO:

        

Owners of the parent company

        149,679        109,245        94,859  

Non-controlling interest

        1,884        1,824        1,226  
     

 

 

    

 

 

    

 

 

 

TOTAL INCOME:

        151,563        111,069        96,085  
     

 

 

    

 

 

    

 

 

 
            U.S dollars  

EARNINGS PER SHARE:

     2w     

Basic

        2.52        1.85        1.62  
     

 

 

    

 

 

    

 

 

 

Fully diluted

        2.51        1.84        1.60  
     

 

 

    

 

 

    

 

 

 

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

 

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FRUTAROM INDUSTRIES LTD.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

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

INCOME FOR THE YEAR

        151,563       111,069        96,085  

Other comprehensive income:

          

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

          

Remeasurement of net defined benefit Liability

        2,716       1,123        (858

ITEMS THAT COULD BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS

          

Gain from available-for-sale financial assets

              41         

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

     15b.2        (41             

Translation differences

        64,428       3,910        (65,293
     

 

 

   

 

 

    

 

 

 

Total comprehensive income for the Year

        218,666       116,143        29,934  
     

 

 

   

 

 

    

 

 

 

ATTRIBUTABLE TO:

          

Owners of the parent

        216,210       114,615        28,911  

Non-controlling interest

        2,456       1,528        1,023  
     

 

 

   

 

 

    

 

 

 

TOTAL INCOME

        218,666       116,143        29,934  
     

 

 

   

 

 

    

 

 

 

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

 

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(Continued)—1

FRUTAROM INDUSTRIES LTD.

CONSODLIATED STATEMENT OF CHANGES IN EQUITY

 

            EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT        
    

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

BALANCE AT JANUARY 1, 2015

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

CHANGES DURING THE YEAR ENDED December 31, 2015:

                    

Comprehensive income:

                    

Income for the year

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

Other comprehensive income

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

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

Plan for allotment of Company shares to employees of subsidiary:

                    

Acquisition of the Company shares by the Company

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

Receipts in respect of allotment of Company shares to employees

     12b               (374                 561       187             187  

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

     12b               1,541                         1,541             1,541  

Proceeds from issuance of shares to senior employees

        90        2,635