filings.toolsItem 1. FINANCIAL STATEMENTS.
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Item 1. FINANCIAL STATEMENTS.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (DOLLARS IN MILLIONS) | September 30, 2021 | December 31, 2020 | |||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 672 | $ | 650 | |||||||
| Restricted cash | 122 | 7 | |||||||||
| Trade receivables (net of allowances of $44 and $21, respectively) | 1,975 | 929 | |||||||||
| Inventories: Raw materials | 852 | 566 | |||||||||
| Work in process | 280 | 38 | |||||||||
| Finished goods | 1,269 | 528 | |||||||||
| Total Inventories | 2,401 | 1,132 | |||||||||
| Assets held for sale | 1,245 | — | |||||||||
| Prepaid expenses and other current assets | 717 | 342 | |||||||||
| Total Current Assets | 7,132 | 3,060 | |||||||||
| Property, plant and equipment, at cost | 5,903 | 2,928 | |||||||||
| Accumulated depreciation | (1,608) | (1,470) | |||||||||
| Property, plant and equipment, net | 4,295 | 1,458 | |||||||||
| Goodwill | 16,590 | 5,593 | |||||||||
| Other intangible assets, net | 10,959 | 2,727 | |||||||||
| Operating lease right-of-use assets | 774 | 299 | |||||||||
| Other assets | 502 | 418 | |||||||||
| Total Assets | $ | 40,252 | $ | 13,555 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Bank borrowings, overdrafts, and current portion of long-term debt | $ | 708 | $ | 634 | |||||||
| Accounts payable | 1,332 | 556 | |||||||||
| Accrued payroll and bonus | 298 | 133 | |||||||||
| Dividends payable | 201 | 82 | |||||||||
| Liabilities held for sale | 87 | — | |||||||||
| Other current liabilities | 953 | 499 | |||||||||
| Total Current Liabilities | 3,579 | 1,904 | |||||||||
| Long-term debt | 10,818 | 3,779 | |||||||||
| Retirement liabilities | 518 | 326 | |||||||||
| Deferred income taxes | 2,610 | 593 | |||||||||
| Operating lease liabilities | 671 | 265 | |||||||||
| Other liabilities | 478 | 268 | |||||||||
| Total Other Liabilities | 15,095 | 5,231 | |||||||||
| Commitments and Contingencies (Note 15) | |||||||||||
| Redeemable noncontrolling interests | 105 | 98 | |||||||||
| Shareholders’ Equity: | |||||||||||
| Common stock 12 1/2¢ par value; 500,000,000 shares authorized; 275,726,629 shares issued as of September 30, 2021 and 128,526,137 shares issued as of December 31, 2020; and 254,542,499 and 106,937,990 shares outstanding as of September 30, 2021 and December 31, 2020, respectively | 35 | 16 | |||||||||
| Capital in excess of par value | 19,817 | 3,853 | |||||||||
| Retained earnings | 3,752 | 4,156 | |||||||||
| Accumulated other comprehensive loss | (1,180) | (698) | |||||||||
| Treasury stock, at cost (21,184,130 and 21,588,147 shares as of September 30, 2021 and December 31, 2020, respectively) | (998) | (1,017) | |||||||||
| Total Shareholders’ Equity | 21,426 | 6,310 | |||||||||
| Noncontrolling interest | 47 | 12 | |||||||||
| Total Shareholders’ Equity including Noncontrolling interest | 21,473 | 6,322 | |||||||||
| Total Liabilities and Shareholders’ Equity | $ | 40,252 | $ | 13,555 |
See Notes to Consolidated Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| (AMOUNTS IN MILLIONS EXCEPT PER SHARE AMOUNTS) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net sales | $ | 3,071 | $ | 1,268 | $ | 8,625 | $ | 3,814 | |||||||||||||||
| Cost of goods sold | 1,981 | 744 | 5,871 | 2,242 | |||||||||||||||||||
| Gross profit | 1,090 | 524 | 2,754 | 1,572 | |||||||||||||||||||
| Research and development expenses | 156 | 89 | 463 | 256 | |||||||||||||||||||
| Selling and administrative expenses | 436 | 235 | 1,299 | 695 | |||||||||||||||||||
| Amortization of acquisition-related intangibles | 195 | 48 | 547 | 145 | |||||||||||||||||||
| Restructuring and other charges | 6 | 1 | 34 | 8 | |||||||||||||||||||
| (Gains) losses on sales of fixed assets | (1) | 1 | (1) | 2 | |||||||||||||||||||
| Operating profit | 298 | 150 | 412 | 466 | |||||||||||||||||||
| Interest expense | 74 | 35 | 216 | 99 | |||||||||||||||||||
| Other (income) expense, net | (26) | 10 | (44) | 5 | |||||||||||||||||||
| Income before taxes | 250 | 105 | 240 | 362 | |||||||||||||||||||
| Provision for income taxes | 53 | 19 | 53 | 61 | |||||||||||||||||||
| Net income | 197 | 86 | 187 | 301 | |||||||||||||||||||
| Net income attributable to noncontrolling interests | 3 | 1 | 7 | 5 | |||||||||||||||||||
| Net income attributable to IFF stockholders | 194 | 85 | 180 | 296 | |||||||||||||||||||
| Other comprehensive (loss) income, after tax: | |||||||||||||||||||||||
| Foreign currency translation adjustments | (339) | 79 | (493) | (226) | |||||||||||||||||||
| Gains (losses) on derivatives qualifying as hedges | 1 | (4) | 7 | (6) | |||||||||||||||||||
| Pension and postretirement net liability | (8) | 3 | 4 | 10 | |||||||||||||||||||
| Other comprehensive (loss) income | (346) | 78 | (482) | (222) | |||||||||||||||||||
| Comprehensive (loss) income attributable to IFF stockholders | $ | (152) | $ | 163 | $ | (302) | $ | 74 | |||||||||||||||
| Net income per share - basic | $ | 0.76 | $ | 0.76 | $ | 0.75 | $ | 2.68 | |||||||||||||||
| Net income per share - diluted | $ | 0.76 | $ | 0.75 | $ | 0.75 | $ | 2.64 | |||||||||||||||
| Average number of shares outstanding - basic | 254 | 112 | 239 | 112 | |||||||||||||||||||
| Average number of shares outstanding - diluted | 255 | 114 | 239 | 114 | |||||||||||||||||||
See Notes to Consolidated Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 187 | $ | 301 | |||||||
| Adjustments to reconcile to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | 861 | 244 | |||||||||
| Deferred income taxes | (148) | (37) | |||||||||
| (Gains) Losses on sale of assets | (1) | 2 | |||||||||
| Stock-based compensation | 44 | 27 | |||||||||
| Pension contributions | (21) | (19) | |||||||||
| Amortization of inventory step-up | 363 | — | |||||||||
| Changes in assets and liabilities, net of acquisitions: | |||||||||||
| Trade receivables | (214) | (94) | |||||||||
| Inventories | (230) | (43) | |||||||||
| Accounts payable | 256 | 22 | |||||||||
| Accruals for incentive compensation | 43 | 19 | |||||||||
| Other current payables and accrued expenses | 99 | 60 | |||||||||
| Other assets/liabilities, net | (113) | (67) | |||||||||
| Net cash provided by operating activities | 1,126 | 415 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property, plant and equipment | (242) | (124) | |||||||||
| Additions to intangible assets | (4) | — | |||||||||
| Proceeds from life insurance contracts | — | 2 | |||||||||
| Maturity of net investment hedges | — | (15) | |||||||||
| Proceeds from disposal of assets | 13 | 18 | |||||||||
| Cash provided by the Merger with N&B | 193 | — | |||||||||
| Proceeds received in advance of sale of business | 115 | — | |||||||||
| Net cash provided by (used in) investing activities | 75 | (119) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Cash dividends paid to shareholders | (466) | (240) | |||||||||
| Decrease in revolving credit facility and short-term borrowings | (105) | (1) | |||||||||
| Proceeds from issuance of commercial paper | 200 | — | |||||||||
| Deferred financing costs | — | (3) | |||||||||
| Repayments of long-term debt | (628) | (335) | |||||||||
| Proceeds from issuance of long-term debt | 3 | 200 | |||||||||
| Contingent consideration paid | (14) | (9) | |||||||||
| Purchases of redeemable noncontrolling interest | — | (22) | |||||||||
| Proceeds from issuance of stock in connection with stock options | 8 | — | |||||||||
| Employee withholding taxes paid | (20) | (8) | |||||||||
| Net cash used in financing activities | (1,022) | (418) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (44) | (18) | |||||||||
| Net change in cash, cash equivalents and restricted cash | 135 | (140) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 660 | 624 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 795 | $ | 484 | |||||||
| Supplemental Disclosures: | |||||||||||
| Interest paid, net of amounts capitalized | $ | 216 | $ | 113 | |||||||
| Income taxes paid | 198 | 101 | |||||||||
| Accrued capital expenditures | 44 | 23 | |||||||||
See Notes to Consolidated Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
| (DOLLARS IN MILLIONS) | Common stock | Capital in excess of par value | Retained earnings | Accumulated other comprehensive (loss) income | Treasury stock | Non-controlling interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Cost | Shares | Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 128,526,137 | $ | 16 | $ | 3,838 | $ | 4,168 | $ | (1,017) | (21,594,097) | $ | (1,017) | $ | 13 | $ | 6,001 | |||||||||||||||||||||||||||||||||||||
| Net income | 85 | 1 | 86 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | 79 | 79 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Losses on derivatives qualifying as hedges; net of tax of $1 | (4) | (4) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability and postretirement adjustment; net of tax of $(1) | 3 | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.77 per share) | (83) | (83) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options/SSARs | — | 424 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units and awards | — | 894 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 8 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable NCI | 1 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on noncontrolling interest and Other | 1 | (2) | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 128,526,137 | $ | 16 | $ | 3,847 | $ | 4,171 | $ | (939) | (21,592,779) | $ | (1,017) | $ | 12 | $ | 6,090 |
| (DOLLARS IN MILLIONS) | Common stock | Capital in excess of par value | Retained earnings | Accumulated other comprehensive (loss) income | Treasury stock | Non-controlling interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Cost | Shares | Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | 270,266,598 | $ | 34 | $ | 19,800 | $ | 3,759 | $ | (834) | (21,216,057) | $ | (998) | $ | 39 | $ | 21,800 | |||||||||||||||||||||||||||||||||||||
| Net income | 194 | 2 | 196 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | (339) | (339) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Gains on derivatives qualifying as hedges; net of tax of $0 | 1 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability and postretirement adjustment; net of tax of $0 | (8) | (8) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.79 per share) | (201) | (201) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options/SSARs | — | 25,063 | 1 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units and awards | 2 | 6,864 | (1) | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 17 | 17 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of N&B Merger | — | — | — | 8 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of tangible equity units | 5,460,031 | 1 | (1) | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable NCI | (1) | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on noncontrolling interest and Other | — | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 275,726,629 | $ | 35 | $ | 19,817 | $ | 3,752 | $ | (1,180) | (21,184,130) | $ | (998) | $ | 47 | $ | 21,473 |
See Notes to Consolidated Financial Statements
| (DOLLARS IN MILLIONS) | Common stock | Capital in excess of par value | Retained earnings | Accumulated other comprehensive (loss) income | Treasury stock | Non-controlling interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Cost | Shares | Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | 128,526,137 | $ | 16 | $ | 3,823 | $ | 4,118 | $ | (717) | (21,738,838) | $ | (1,023) | $ | 12 | $ | 6,229 | |||||||||||||||||||||||||||||||||||||
| Net income | 296 | 2 | 298 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | (226) | (226) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Losses on derivatives qualifying as hedges; net of tax of $1 | (6) | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability and postretirement adjustment; net of tax of $(3) | 10 | 10 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($2.27 per share) | (243) | (243) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options/SSARs | (1) | 57,652 | 3 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units and awards | (7) | 88,407 | 3 | (4) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 27 | 27 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable NCI | 5 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on noncontrolling interest and Other | — | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 128,526,137 | $ | 16 | $ | 3,847 | $ | 4,171 | $ | (939) | (21,592,779) | $ | (1,017) | $ | 12 | $ | 6,090 |
| (DOLLARS IN MILLIONS) | Common stock | Capital in excess of par value | Retained earnings | Accumulated other comprehensive (loss) income | Treasury stock | Non-controlling interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Cost | Shares | Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | 128,526,137 | $ | 16 | $ | 3,853 | $ | 4,156 | $ | (698) | (21,588,147) | $ | (1,017) | $ | 12 | $ | 6,322 | |||||||||||||||||||||||||||||||||||||
| Net income | 180 | 3 | 183 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | (493) | (493) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Gains on derivatives qualifying as hedges; net of tax of $1 | 7 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability and postretirement adjustment; net of tax of $(1) | 4 | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($2.33 per share) | (584) | (584) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options/SSARs | 2 | 139,698 | 7 | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units and awards | (16) | 264,319 | 12 | (4) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 44 | 44 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of N&B Merger | 141,740,461 | 18 | 15,936 | 34 | 15,988 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of tangible equity units | 5,460,031 | 1 | (1) | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable NCI | (1) | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on noncontrolling interest and Other | (2) | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 275,726,629 | $ | 35 | $ | 19,817 | $ | 3,752 | $ | (1,180) | (21,184,130) | $ | (998) | $ | 47 | $ | 21,473 |
See Notes to Consolidated Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
International Flavors & Fragrances Inc. and its subsidiaries (the “Registrant,” “IFF,” “the Company,” “we,” “us” and “our”) is a leading creator and manufacturer of food, beverage, health & biosciences, scent and pharma solutions and complementary adjacent products, including cosmetic active and natural health ingredients, which are used in a wide variety of consumer products. Our products are sold principally to manufacturers of perfumes and cosmetics, hair and other personal care products, soaps and detergents, cleaning products, dairy, meat and other processed foods, beverages, snacks and savory foods, sweet and baked goods, sweeteners, dietary supplements, food protection, infant and elderly nutrition, functional food, and pharmaceutical excipients and oral care products.
Basis of Presentation
These interim Consolidated Financial Statements and related management’s discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related notes and management’s discussion and analysis of results of operations, liquidity and capital resources included in our 2020 Annual Report on Form 10-K (“2020 Form 10-K”).
These interim Consolidated Financial Statements are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted, if not materially different from the 2020 Form 10-K. The year-end balance sheet data included in this Form 10-Q was derived from the audited financial statement. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim Consolidated Financial Statements, have been made.
On February 1, 2021 (the “Closing Date”), the Company completed the combination (the "Merger") of IFF and DuPont de Nemours, Inc (“DuPont”) nutrition and biosciences business (the “N&B Business”), which had been transferred to Nutrition and Biosciences, Inc., a Delaware corporation and wholly owned subsidiary of DuPont ("N&B") in a Reverse Morris Trust transaction. See Note 3 for additional information. As a result, the Company’s Consolidated Financial Statements for the three and nine months ended September 30, 2021 reflect the results of N&B from the Closing Date, whereas the Company’s Consolidated Financial Statements for the three and nine months ended September 30, 2020 do not.
In the current year, the Company has changed its presentation from thousands to millions and, as a result, any necessary rounding adjustments have been made to prior year disclosed amounts.
Reporting Periods
Effective 2021, the Company changed its fiscal year end from a 52/53-week fiscal year ending on the Friday closest to the last day of the quarter, to a calendar year of the twelve-month period from January 1 to December 31. The Company elected to change its fiscal year end in connection with the Merger with N&B to align the Company’s fiscal year with N&B’s. For the 2020 comparative quarter presented, the actual closing date was October 2. For ease of presentation, September 30 and December 31 are used consistently throughout this Form 10-Q and these interim financial statements and related notes to represent the period-end dates in the comparative periods. The three and nine months ended September 30, 2021 both contained two fewer business days than the corresponding periods in 2020, however the impact of this on revenue and net income for the three and nine months ended September 30, 2021 was not material.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. The inputs into our judgments and estimates take into account the current economic implications of the novel coronavirus ("COVID-19") on our critical and significant accounting estimates, including estimates associated with future cash flows that are used in assessing the risk of impairment of certain long-lived assets. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Company's statement of cash flows periods ended September 30, 2021 and September 30, 2020 to the amounts reported in the Company's balance sheet as of September 30, 2021, December 31, 2020, September 30, 2020 and December 31, 2019. The increase in restricted cash as of September 30, 2021 is due to proceeds received in advance of the sale of the Company's fruit preparation business. See Note 17 for additional information.
| (DOLLARS IN MILLIONS) | September 30, 2021 | December 31, 2020 | September 30, 2020 | December 31, 2019 | |||||||||||||||||||
| Current assets | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 672 | $ | 650 | $ | 470 | $ | 607 | |||||||||||||||
| Restricted cash | 122 | 7 | 13 | 17 | |||||||||||||||||||
| Noncurrent assets | |||||||||||||||||||||||
| Restricted cash included in Other assets | 1 | 3 | 1 | — | |||||||||||||||||||
| Cash, cash equivalents and restricted cash | $ | 795 | $ | 660 | $ | 484 | $ | 624 |
Accounts Receivable
The Company has various factoring agreements in the U.S. and The Netherlands under which it can factor up to approximately $100 million in receivables. In addition, the Company has factoring agreements sponsored by certain customers. Under all of the arrangements, the Company sells the receivables on a non-recourse basis to unrelated financial institutions and accounts for the transactions as a sale of receivables. The applicable receivables are removed from the Company's Consolidated Balance Sheets when the cash proceeds are received by the Company.
The impact on cash provided by operations from participating in these programs was an increase of $3 million for the nine months ended September 30, 2021 and an increase of $4 million for the nine months ended September 30, 2020. The cost of participating in these programs was approximately $2 million and $1 million for the three months ended September 30, 2021 and 2020, respectively, and was $5 million and $3 million for the nine months ended September 30, 2021 and 2020, respectively.
Revenue Recognition
The Company recognizes revenue when control of the promised goods is transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods. Sales, value added, and other taxes the Company collects are excluded from revenues. The Company receives payment in accordance with standard customer terms. See Note 11 for further details on revenues disaggregated by segment.
Contract Assets and Liabilities
With respect to a small number of contracts for the sale of compounds, the Company has an “enforceable right to payment for performance to date” and as the products do not have an alternative use, the Company recognizes revenue for these contracts over time and records a contract asset using the output method. The output method recognizes revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract.
As of September 30, 2021 and December 31, 2020, the Company's gross accounts receivable was $2.019 billion and $950 million, respectively. The Company's contract assets and contract liabilities as of September 30, 2021 and December 31, 2020 were not material.
Expected Credit Losses
The Company is exposed to credit losses primarily through its sales of products. To determine the appropriate allowance for expected credit losses, the Company considers certain credit quality indicators, such as aging, collection history, and creditworthiness of debtors. Regional and Global Credit committees review and approve specific customer allowance reserves. The allowance for expected credit losses is primarily based on two primary factors: i) the aging of the different categories of trade receivables, and ii) a specific reserve for accounts identified as uncollectible.
The Company also considers current and future economic conditions in the determination of the allowance. At September 30, 2021, the Company reported $1.975 billion of trade receivables, net of allowances of $44 million. Based on the aging analysis as of September 30, 2021, approximately 91% of our accounts receivable were current based on the payment terms of the invoice. Receivables that are past due by over 365 days account for approximately 1% of our accounts receivable.
The following is a rollforward of the Company's allowances for bad debts for the nine months ended September 30, 2021, with the write-offs being under $1 million, which was not material:
| (DOLLARS IN MILLIONS) | Allowances for Bad Debts | ||||
| Balance at December 31, 2020 | $ | 21 | |||
| Bad debt expense | 4 | ||||
| Other adjustments(1) | 20 | ||||
| Foreign exchange | (1) | ||||
| Balance at September 30, 2021 | $ | 44 |
(1)The adjustment to allowances for bad debts was a result of purchase price allocation related to the Merger with N&B.
Long-lived assets
Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is calculated on a straight-line basis, principally over the following estimated useful lives: buildings and improvements, 1 to 50 years; machinery and equipment, 1 to 40 years; information technology hardware and software, 1 to 23 years; and leasehold improvements which are included in buildings and improvements, the estimated life of the improvements or the remaining term of the lease, whichever is shorter.
Finite-Lived Intangible Assets Finite-lived intangible assets include customer relationships, patents, trade names, technological know-how and other intellectual property valued at acquisition and amortized on a straight-line basis over the following estimated useful lives: customer relationships, 10 to 27 years; patents, 11 to 15 years; trade names, 4 to 28 years; and technological know-how, 5 to 28 years.
The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their carrying value may not be recovered. An estimate of undiscounted future cash flows produced by an asset or group of assets is compared to the carrying value to determine whether impairment exists. If assets are determined to be impaired, the loss is measured based on an estimate of fair value using various valuation techniques, including a discounted estimate of future cash flows.
Recent Accounting Pronouncements
In January 2021, the FASB issued Accounting Standards Update ("ASU") 2021-01, "Reference Rate Reform (Topic 848): Scope." The ASU is intended to provide updates and responses to concerns over Topic 848 related to the cessation of reference rates in certain financial markets. Alternative reference rates that are more observable or transaction based have been identified and are being transitioned to in numerous jurisdictions globally, such as a receive-variable-rate, pay-variable-rate cross currency interest rate swap. This guidance is effective immediately for all entities, but does not apply to any contract modifications or new hedging relationships entered into after December 31, 2022. The Company is currently evaluating the impact of this guidance, but does not expect this guidance to have a material impact on its Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU is intended to simplify various aspects related to the cessation of reference rates in certain financial markets that would otherwise create modification accounting or changes in estimate. This guidance is effective for the period from March 12, 2020 to December 31, 2022. The Company has not adopted any of the optional expedients or exceptions through September 30, 2021 but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, and intended to simplify various aspects related to accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. This guidance was adopted on January 2, 2021 and does not have a material impact on the Company's Consolidated Financial Statements.
NOTE 2. NET INCOME PER SHARE
A reconciliation of the shares used in the computation of basic and diluted net income per share is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (AMOUNTS IN MILLIONS EXCEPT PER SHARE AMOUNTS) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net Income | |||||||||||||||||||||||
| Net income attributable to IFF stockholders | $ | 194 | $ | 85 | $ | 180 | $ | 296 | |||||||||||||||
| Adjustment related to (increase) decrease in redemption value of redeemable noncontrolling interests in excess of earnings allocated | (1) | 1 | (1) | 5 | |||||||||||||||||||
| Net income available to IFF stockholders | $ | 193 | $ | 86 | $ | 179 | $ | 301 | |||||||||||||||
| Shares | |||||||||||||||||||||||
| Weighted average common shares outstanding (basic)(1) | 254 | 112 | 239 | 112 | |||||||||||||||||||
| Adjustment for assumed dilution(2): | |||||||||||||||||||||||
| Stock options and restricted stock awards | 1 | 1 | — | 1 | |||||||||||||||||||
| SPC portion of TEUs | — | 1 | — | 1 | |||||||||||||||||||
| Weighted average shares assuming dilution (diluted) | 255 | 114 | 239 | 114 | |||||||||||||||||||
| Net Income per Share | |||||||||||||||||||||||
| Net income per share - basic(3) | $ | 0.76 | $ | 0.76 | $ | 0.75 | $ | 2.68 | |||||||||||||||
| Net income per share - diluted | 0.76 | 0.75 | 0.75 | 2.64 |
(1)On September 15, 2021, additional shares of IFF's common stock were issued in settlement of the stock purchase contract ("SPC") portion of the tangible equity units ("TEUs"). For the three and nine months ended September 30, 2020, the TEUs were assumed to be outstanding at the minimum settlement amount for basic earnings per share ("EPS"). See below for additional information.
(2)Effect of dilutive securities includes dilution under stock plans and incremental impact of TEUs. See below for additional information.
(3)For the three and nine months ended September 30, 2020, the basic net income per share cannot be recalculated based on the information presented in the table above due to the effects of rounding and change in presentation from thousands to millions between 2020 and 2021, respectively.
As of the effective time of the Merger, each issued and outstanding share of common stock of N&B (except for shares of common stock of N&B held by N&B as treasury stock or by DuPont, which were canceled and ceased to exist and no consideration was delivered in exchange therefor) was converted into the right to receive one share of common stock of IFF. The Merger was completed in exchange for 141,740,461 shares of IFF common stock, par value $0.125 per share (or cash payment in lieu of fractional shares), which had been approved in the special shareholder meeting that occurred on August 27, 2020 where IFF shareholders voted to approve the issuance of shares of IFF common stock in connection with the N&B Transaction, pursuant to an Agreement and Plan of Merger (the "Merger Agreement"). The shares issued in the Merger represented approximately 55.4% of the common stock of IFF on a fully diluted basis, after giving effect to the Merger, as of February 1, 2021.
The Company declared a quarterly dividend to its shareholders of $0.79 and $0.77 per share for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, the Company declared quarterly dividends to its shareholders totaling $2.33 and $2.27, respectively.
There were no stock options or stock-settled appreciation rights (“SSARs”) excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2021 and 2020.
The Company issued 16,500,000 TEUs, consisting of a prepaid SPC and a senior amortizing note, for net proceeds of $800 million on September 17, 2018. On September 14, 2021, the Company notified holders of the TEUs that the final settlement rate in respect of each SPC was 0.330911 shares of IFF's common stock. On September 15, 2021, 5,460,031 shares of IFF's common stock were issued in settlement of the SPCs. The SPC conversion factor is based on the 20 day volume-weighted average price (“VWAP”) per share of the Company’s common stock. For purposes of calculating basic net income per share, the settlement rates of 0.330911, the final settlement rate, and 0.313400 shares per SPC on September 30, 2021 and 2020, respectively, were used. For purposes of calculating diluted earnings per share, the settlement rates of 0.330911, the final settlement rate, and 0.383900 shares per SPC on September 30, 2021 and 2020, respectively, were used.
The Company has issued shares of purchased restricted common stock units (“PRSUs”) which contain rights to nonforfeitable dividends while these shares are outstanding and thus are considered participating securities. Such securities are required to be included in the computation of basic and diluted earnings per share pursuant to the two-class method.
The Company did not present the two-class method since there was no difference between basic net income per share for both unrestricted common shareholders and PRSU shareholders for the three and nine months ended September 30, 2021 and 2020. The difference between diluted net income per share for both unrestricted common shareholders and PRSU shareholders for the three and nine months ended September 30, 2021 and three months ended September 30, 2020 was less than $0.01 per share and for the nine months ended September 30, 2020 was less than $0.03 per share. In addition, the number of PRSUs outstanding as of September 30, 2021 and 2020 was not material. Net income allocated to such PRSUs was not material for the three and nine months ended September 30, 2021 and 2020.
NOTE 3. ACQUISITIONS
Transaction with Nutrition & Biosciences, Inc.
On February 1, 2021, IFF completed the Merger with N&B. Pursuant to the transaction related agreements, DuPont transferred its N&B Business to N&B, a wholly-owned subsidiary of DuPont, and N&B merged with and into a wholly owned subsidiary of IFF in exchange for 141,740,461 shares of IFF common stock, par value $0.125 per share (“IFF Common Stock”).
On the Closing Date, the Company completed its Merger with N&B in a Reverse Morris Trust transaction (the “Transactions”), pursuant to which the Company acquired the N&B Business of DuPont. In the Transactions, among other steps (i) DuPont transferred the N&B Business to N&B (the “Separation”); (ii) N&B made a cash distribution to DuPont of approximately $7.359 billion, subject to certain adjustments (the “Special Cash Payments”); (iii) DuPont distributed to its stockholders all of the issued and outstanding shares of N&B common stock by way of an exchange offer (the “Distribution”), and; (iv) N&B merged with and into a wholly owned subsidiary of IFF. As a result of the Merger, the existing shares of N&B common stock were automatically converted into the right to receive a number of shares of IFF Common Stock. Immediately after the Merger, holders of DuPont’s common stock that received shares of N&B common stock in the Distribution owned approximately 55.4% of the outstanding shares of IFF Common Stock on a fully diluted basis and existing holders of IFF Common Stock owned approximately 44.6% of the outstanding shares of IFF on a fully diluted basis.
The Merger was accounted for using the purchase method of accounting in accordance with ASC Topic 805, Business Combinations, with IFF identified as the acquirer. As a result of the Merger, N&B’s assets, liabilities and the operating results of N&B were included in the Company’s financial statements from the Closing Date. N&B contributed net sales of approximately $1.640 billion and net income of approximately $93 million for the three months ended September 30, 2021 and net sales of approximately $4.409 billion and net loss of approximately $51 million for the nine months ended September 30, 2021, which includes the effects of purchase accounting adjustments, primarily related to changes in amortization of intangible assets, depreciation of property, plant and equipment and amortization of stepped up inventory.
Prior to the Distribution, N&B incurred new indebtedness in the form of term loans and senior notes in an aggregate principal amount of $7.500 billion to pay the Special Cash Payments made to DuPont stockholders. See Note 7 for additional information regarding the new term loans and senior notes incurred by N&B and subsequently assumed by IFF.
Purchase Price
The following table summarizes the aggregate purchase price consideration paid to acquire N&B (in millions, except share and per share data):
| (DOLLARS IN MILLIONS) | |||||
| Fair value of common stock issued to DuPont stockholders(1) | $ | 15,929 | |||
| Fair value attributable to pre-merger service for replacement equity awards(2) | 25 | ||||
| Total purchase consideration | $ | 15,954 |
(1)The fair value of common stock issued to DuPont stockholders represents 141,740,461 shares of the Company's common stock determined based on the number of fully diluted shares of IFF common stock, immediately prior to the Closing Date, multiplied by the quotient of 55.4%/44.6% and IFF common stock closing share price of $112.38 on the New York Stock Exchange on the Closing Date.
(2)At the time of the Transactions, each outstanding stock option, cash-settled stock appreciation right (“SAR”), restricted stock unit (“RSU”) award, and restricted stock award (“RSA”) with respect to DuPont common stock held by employees of N&B were canceled and converted into similar classes of equity awards of IFF’s Class A Common Stock. Further, each outstanding Performance Share Unit (“PSU”) award with respect to DuPont common stock held by employees of N&B were canceled and converted into IFF’s RSU awards. The conversion was based on the ratio of the volume-weighted average per share closing price of DuPont stock on the twenty trading days prior to the Closing Date and IFF’s stock on the twenty trading days following the Closing Date. The fair value of replacement equity-based awards attributable to pre-Merger service was recorded as part of the consideration transferred in the Merger (see Note 10 for additional information).
Purchase Price Allocation
The Merger with N&B was accounted for under the acquisition method under which the Company allocated the purchase consideration to the tangible net assets and identifiable assets acquired based on estimated fair values at the Closing Date, and recorded the excess of consideration over the fair values of net assets acquired as goodwill. The purchase price allocation is preliminary and is subject to change. The Company is still evaluating the valuation and estimated useful lives of property, plant and equipment, goodwill, intangible assets (trade names, customer relationships and technological know-hows), inventory and leases, in addition to ensuring all other assets and liabilities and contingencies have been identified and recorded. The purchase price allocation is expected to be completed in the fourth quarter of 2021. The Company has estimated the preliminary fair value of net assets acquired based on information currently available and will continue to adjust those estimates as additional information becomes available during the measurement period. As of September 30, 2021, the Company has not finalized its assessment of the In-Process Research and Development (IPR&D) assets acquired as part of the Transactions. Further, the assessment of certain contingencies including loss contracts and environmental liabilities, pension and postretirement benefit obligations and taxes remain open for completion of the related analysis. Additionally, the Company is finalizing the projected combined future tax rate to be applied to the valuation of assets, which could impact the valuation of goodwill and intangible assets. The Company will finalize its accounting for the N&B Merger, including the allocation of goodwill to reporting units, within one year of the Closing Date.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed:
| (DOLLARS IN MILLIONS) | Preliminary Estimated Fair Value as Reported in the First Quarter of 2021 | Measurement Period Adjustments**(1)** | As Reported in the Third Quarter of 2021 | ||||||||||||||
| Cash and cash equivalents | $ | 207 | $ | (14) | $ | 193 | |||||||||||
| Receivables | 962 | (9) | 953 | ||||||||||||||
| Inventory | 1,615 | (29) | 1,586 | ||||||||||||||
| Prepaid expenses and other current assets | 342 | 1 | 343 | ||||||||||||||
| Property, plant and equipment | 3,242 | (178) | 3,064 | ||||||||||||||
| Deferred income taxes | 75 | 2 | 77 | ||||||||||||||
| Intangible assets | 9,176 | 122 | 9,298 | ||||||||||||||
| Other assets | 702 | 44 | 746 | ||||||||||||||
| Accounts payable and accrued liabilities | (1,028) | (19) | (1,047) | ||||||||||||||
| Accrued payroll and employee benefits | (163) | 1 | (162) | ||||||||||||||
| Deferred tax liabilities | (2,369) | 29 | (2,340) | ||||||||||||||
| Long-term debt | (7,636) | — | (7,636) | ||||||||||||||
| Other long-term liabilities | (907) | 18 | (889) | ||||||||||||||
| Total identifiable net assets assumed | 4,218 | (32) | 4,186 | ||||||||||||||
| Non-controlling interest | (26) | (8) | (34) | ||||||||||||||
| Goodwill | 11,762 | 40 | 11,802 | ||||||||||||||
| Preliminary purchase price | $ | 15,954 | $ | — | $ | 15,954 |
(1)The preliminary fair value purchase price allocation of the assets and liabilities acquired in the N&B Merger as reported in the first quarter of 2021 were updated during the six months ended September 30, 2021 to reflect updated fair values for intangible assets, property, plant and equipment, and inventory. In addition, the carrying amounts of certain assets and liabilities were updated based on additional analysis of acquired assets and liabilities that existed at the acquisition date. The cumulative impact of the adjustments during the six months ended September 30, 2021 resulted in a $40 million increase to goodwill.
Acquired inventory is comprised of finished goods, work in process and raw materials. The preliminary fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort. The preliminary fair value of work in process inventory was primarily calculated as the estimated selling price, adjusted for estimated costs to complete the manufacturing, estimated costs of the selling effort, as well as a reasonable profit margin on the remaining manufacturing and selling effort. The preliminary fair value of raw materials and supplies was determined based on replacement cost which approximates historical carrying value. The preliminary fair value step-up has been amortized to “Cost of goods sold” in the Consolidated Statements of Income and Comprehensive (Loss) Income as the inventory was sold.
The preliminary fair value of property, plant and equipment was primarily calculated using the cost approach, which determines the replacement costs for the assets and adjusts it for their age and condition. The fair value of the land assets was determined via the sales comparison approach.
The long-term debt assumed is comprised of a Term Loan Facility and Notes. The fair value of the Notes was determined on the basis of unadjusted quoted prices on an over-the-counter market. The fair value of the long-term debt assumed as part of the Term Loan Facility is based on the total indebtedness at the time of closing the Merger.
The Company has recognized $11.802 billion of goodwill to date in connection with the N&B Merger, which is in part attributable to expected synergies generated by the integration of N&B including cross-selling benefits as well as cost synergies, substantially all of which is not deductible for income tax purposes. Any further changes in the estimated fair values of the assets acquired and liabilities assumed in the Merger may change the amount of the purchase consideration allocated to goodwill. Goodwill of $2.702 billion, $6.651 billion, $910 million and $1.539 billion is allocated to the Nourish, Health & Biosciences, Scent and Pharma Solutions segments, respectively. The allocation of goodwill to segments was based on a preliminary analysis and is subject to change during the measurement period.
The estimated preliminary fair value and useful lives of the identifiable intangible assets are as follows:
| (DOLLARS IN MILLIONS) | Estimated Amounts | Estimated Useful Lives | ||||||
| Finite lived intangible assets | ||||||||
| Trade names | $ | 262 | 4 to 22 years | |||||
| Customer relationships | 6,855 | 10 to 27 years | ||||||
| Technological know-how | 2,160 | 5 to 18 years | ||||||
| Other | 21 | 2 years | ||||||
| Total | $ | 9,298 |
The fair value of intangible assets is generally determined using an income method, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other market participants, and include the amount and timing of future cash flows (including expected growth rates and profitability), royalty rates used in the relief from royalty method, customer attrition rates, product obsolescence factors, a brand’s relative market position and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions. Determining the useful life of an intangible asset also requires significant judgment. Trade names, customer relationships and technological know-hows are expected to have finite lives. The costs of finite-lived intangible assets are amortized through expense over their estimated lives.
Lease liabilities, included in “Other current liabilities” and “Operating lease liabilities” in the Consolidated Balance Sheets, at the Closing Date, are remeasured at the present value of the future minimum lease payments over the remaining lease term and the incremental borrowing rate of the Company as if the acquired leases were new leases as of the Closing Date. Right-of-use assets included in "Operating lease right-of-use assets" and “Other assets” in the Consolidated Balance Sheets as of the Closing Date, are equal to the amount of the lease liability at the Closing Date. As of September 30, 2021, the Company has not finalized its assessment of any off-market terms of the leases. The remaining lease term is based on the remaining term at the Closing Date plus any renewal or extension options that the Company is reasonably certain will be exercised.
The deferred income tax assets and liabilities include the expected future federal, state and foreign tax consequences associated with temporary differences between the preliminary fair values of the assets acquired and liabilities assumed and the respective tax bases. Tax rates utilized in calculating deferred income taxes generally represent the enacted statutory tax rates at the effective date of the Merger in the jurisdictions in which legal title of the underlying asset or liability resides. See Note 9 for additional information related to income taxes.
Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of operations of IFF and N&B as if the Merger had been completed as of the prior fiscal year, or January 1, 2020. The unaudited pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the Merger and related borrowings had taken place on January 1, 2020, nor are they indicative of future results. The unaudited pro forma financial information for the nine months ended September 30, 2021 includes IFF results, including the post-Merger results of N&B, since February 1, 2021, and pre-Merger results of N&B for the period January 1, 2021 through January 31, 2021.
The unaudited pro forma results for the nine months ended September 30, 2021 and 2020 were as follows:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | |||||||||||||||||||||
| Unaudited pro forma net sales | $ | 9,132 | $ | 8,371 | |||||||||||||||||||
| Unaudited pro forma net income attributable to the Company | 593 | 96 |
The unaudited pro forma results for all periods include adjustments made to account for certain costs and transactions that would have been incurred had the Merger been completed as of January 1, 2020, including amortization charges for acquired intangibles assets, adjustments for transaction costs, adjustments for depreciation expense for property, plant and equipment, inventory step-up and adjustments to interest expense. These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above.
For the three months ended September 30, 2021, the transaction-related costs incurred by the Company were not material. For the nine months ended September 30, 2021, the Company incurred transaction-related costs of approximately $91 million. This amount primarily consists of the following: approximately $79 million of merger and acquisition advisory fees and $12 million of professional services fees, legal fees and others.
NOTE 4. RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges primarily consist of separation costs for employees including severance, outplacement and other employee benefit costs ("Severance"), charges related to the write-down of fixed assets of plants to be closed ("Fixed asset write-down") and all other related restructuring ("Other") costs. All restructuring and other charges are separately stated on the Consolidated Statements of Income and Comprehensive (Loss) Income.
Frutarom Integration Initiative
In connection with the acquisition of Frutarom, the Company has been executing an integration plan that, among other initiatives, seeks to optimize its manufacturing network (the "Frutarom Integration Initiative"). As part of the Frutarom Integration Initiative, the Company now expects to close approximately 30 manufacturing sites with most of the closures targeted to occur by the end of 2022. Between 2019 and 2020, the Company completed the closure of 21 sites. During the nine months ended September 30, 2021, the Company completed the closure of one site. Since the inception of the initiative through September 30, 2021, the Company has closed 22 sites and expensed total costs of approximately $34 million. Total costs for the program are expected to be approximately $43 million including cash and non-cash items through 2022.
2019 Severance Program
During the year ended December 31, 2019, the Company incurred severance charges related to approximately 190 headcount reductions, excluding those previously mentioned under the Frutarom Integration Initiative. The headcount reductions primarily related to the Scent business unit with additional amounts related to headcount reductions in all business units associated with the establishment of a new shared service center in Europe. Since the inception of the program, the Company has expensed approximately $21 million to date. As of September 30, 2021, the program is largely completed.
N&B Merger Restructuring Liability
For the nine months ended September 30, 2021, the Company incurred approximately $26 million of charges related to severance for approximately 200 headcount reductions that will or have occurred in 2021.
Changes in Restructuring Liabilities
Changes in restructuring liabilities by program during the nine months ended September 30, 2021 were as follows:
| (DOLLARS IN MILLIONS) | Balance at December 31, 2020 | Additional Charges (Reversals), Net | Non-Cash Charges | Cash Payments | Impact of N&B Merger**(2)** | Balance at September 30, 2021 | |||||||||||||||||||||||||||||
| Frutarom Integration Initiative | |||||||||||||||||||||||||||||||||||
| Severance | $ | 3 | $ | 3 | $ | — | $ | (2) | $ | — | $ | 4 | |||||||||||||||||||||||
| Fixed asset write down | — | 4 | (4) | — | — | — | |||||||||||||||||||||||||||||
| Other(1) | 3 | — | — | — | — | 3 | |||||||||||||||||||||||||||||
| 2019 Severance Plan | |||||||||||||||||||||||||||||||||||
| Severance | 6 | — | — | (1) | — | 5 | |||||||||||||||||||||||||||||
| Other Restructuring Charges | |||||||||||||||||||||||||||||||||||
| Severance | 2 | — | — | (1) | — | 1 | |||||||||||||||||||||||||||||
| Other(3) | — | 1 | — | (1) | — | — | |||||||||||||||||||||||||||||
| N&B Merger Restructuring Liability | |||||||||||||||||||||||||||||||||||
| Severance | — | 26 | — | (7) | 4 | 23 | |||||||||||||||||||||||||||||
| Total restructuring | $ | 14 | $ | 34 | $ | (4) | $ | (12) | $ | 4 | $ | 36 |
(1)Other includes supplier contract termination costs, consulting and advisory fees.
(2)Restructuring liabilities related to severance assumed as a result of the Merger with N&B.
(3)Includes charges related to legal settlement costs.
Charges by Segment
The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Nourish | $ | 5 | $ | 1 | $ | 25 | $ | 8 | |||||||||||||||
| Health & Biosciences | 1 | — | 5 | — | |||||||||||||||||||
| Scent | — | — | 3 | — | |||||||||||||||||||
| Pharma Solutions | — | — | 1 | — | |||||||||||||||||||
| Total Restructuring and other charges | $ | 6 | $ | 1 | $ | 34 | $ | 8 |
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
In the first quarter of 2021, in connection to the Merger, the Company reorganized its reporting structure. In connection with this reorganization, goodwill was reassigned among reporting units using a relative fair value approach based on the fair value of the elements transferred and the fair value of the elements remaining within the original reporting units. The Company tested goodwill for impairment on a pre-reorganization basis and determined there was no impairment for the affected reporting units. In connection with the reorganization, $985 million of goodwill previously included in the Taste segment, now the Nourish segment, was moved to the Scent and Health & Biosciences segments amounting to $257 million and $728 million, respectively.
Movements in goodwill attributable to each reportable segment for the nine months ended September 30, 2021 were as follows:
| (DOLLARS IN MILLIONS) | Nourish | Health & Biosciences | Scent | Pharma Solutions | Total | ||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 4,859 | $ | — | $ | 734 | $ | — | $ | 5,593 | |||||||||||||||||||||||||
| Acquisitions(1) | 2,702 | 6,651 | 910 | 1,539 | 11,802 | ||||||||||||||||||||||||||||||
| Transferred to assets held for sale | (26) | (473) | — | — | (499) | ||||||||||||||||||||||||||||||
| Foreign exchange | (135) | (116) | (30) | (25) | (306) | ||||||||||||||||||||||||||||||
| Reallocation | (985) | 728 | 257 | — | — | ||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | 6,415 | $ | 6,790 | $ | 1,871 | $ | 1,514 | $ | 16,590 |
(1)Acquisitions relate to the Merger with N&B. The amount of goodwill, and allocation of goodwill among reporting units, from the Merger with the N&B Business is updated as of the third quarter of 2021 and may change in future periods as a result of purchase accounting being finalized. See Note 3 for additional information.
Other Intangible Assets
Other intangible assets, net consisted of the following amounts:
| September 30, | December 31, | ||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | |||||||||
| Asset Type | |||||||||||
| Customer relationships | $ | 9,203 | $ | 2,728 | |||||||
| Trade names & patents | 387 | 187 | |||||||||
| Technological know-how | 2,489 | 479 | |||||||||
| Other | 51 | 38 | |||||||||
| Total carrying value | 12,130 | 3,432 | |||||||||
| Accumulated Amortization | |||||||||||
| Customer relationships | (754) | (470) | |||||||||
| Trade names & patents | (94) | (38) | |||||||||
| Technological know-how | (288) | (168) | |||||||||
| Other | (35) | (29) | |||||||||
| Total accumulated amortization | (1,171) | (705) | |||||||||
| Other intangible assets, net | $ | 10,959 | $ | 2,727 |
Amortization
Amortization expense was $195 million and $48 million for the three months ended September 30, 2021 and 2020, respectively, and $547 million and $145 million for the nine months ended September 30, 2021 and 2020, respectively.
Amortization expense for the next five years is expected to be as follows:
| (DOLLARS IN MILLIONS) | 2021 | 2022 | 2023 | 2024 | 2025 | ||||||||||||||||||||||||
| Estimated future intangible amortization expense | $ | 191 | $ | 763 | $ | 753 | $ | 752 | $ | 750 |
NOTE 6. OTHER ASSETS AND LIABILITIES, CURRENT AND NONCURRENT
Other current assets consisted of the following amounts:
| (DOLLARS IN MILLIONS) | September 30, 2021 | December 31, 2020 | |||||||||
| Value-added tax receivable | $ | 191 | $ | 93 | |||||||
| Income tax receivable | 84 | 100 | |||||||||
| Prepaid expenses | 297 | 100 | |||||||||
| Other | 145 | 49 | |||||||||
| Total | $ | 717 | $ | 342 |
Other assets consisted of the following amounts:
| (DOLLARS IN MILLIONS) | September 30, 2021 | December 31, 2020 | |||||||||
| Finance lease right-of-use assets | $ | 20 | $ | 8 | |||||||
| Deferred income taxes | 114 | 197 | |||||||||
| Overfunded pension plans | 120 | 101 | |||||||||
| Cash surrender value of life insurance contracts | 51 | 49 | |||||||||
| Other(1) | 197 | 63 | |||||||||
| Total | $ | 502 | $ | 418 |
(1)Includes land usage rights in China and long term deposits.
Other current liabilities consisted of the following amounts:
| (DOLLARS IN MILLIONS) | September 30, 2021 | December 31, 2020 | |||||||||
| Rebates and incentives payable | $ | 101 | $ | 64 | |||||||
| Value-added tax payable | 54 | 20 | |||||||||
| Interest payable | 69 | 29 | |||||||||
| Current pension and other postretirement benefit obligation | 11 | 13 | |||||||||
| Accrued insurance (including workers’ compensation) | 8 | 11 | |||||||||
| Earn outs payable | 2 | 14 | |||||||||
| Restructuring and other charges | 36 | 14 | |||||||||
| Current operating lease obligation | 108 | 41 | |||||||||
| Current financing lease obligation | 4 | 3 | |||||||||
| Accrued income taxes | 52 | 42 | |||||||||
| Other accounts payable and accrued expenses payable | 290 | 160 | |||||||||
| Other | 218 | 88 | |||||||||
| Total | $ | 953 | $ | 499 |
NOTE 7. DEBT
Debt consisted of the following:
| (DOLLARS IN MILLIONS) | Effective Interest Rate | September 30, 2021 | December 31, 2020 | ||||||||||||||
| 2021 Euro Notes(1) | 0.82 | % | $ | — | $ | 368 | |||||||||||
| 2022 Notes(3) | 0.69 | % | 300 | — | |||||||||||||
| 2023 Notes(1) | 3.30 | % | 300 | 299 | |||||||||||||
| 2024 Euro Notes(1) | 1.88 | % | 584 | 614 | |||||||||||||
| 2025 Notes(3) | 1.22 | % | 1,001 | — | |||||||||||||
| 2026 Euro Notes(1) | 1.93 | % | 930 | 978 | |||||||||||||
| 2027 Notes(3) | 1.56 | % | 1,219 | — | |||||||||||||
| 2028 Notes(1) | 4.57 | % | 397 | 397 | |||||||||||||
| 2030 Notes(3) | 2.21 | % | 1,511 | — | |||||||||||||
| 2040 Notes(3) | 3.04 | % | 775 | — | |||||||||||||
| 2047 Notes(1) | 4.44 | % | 494 | 494 | |||||||||||||
| 2048 Notes(1) | 5.12 | % | 786 | 786 | |||||||||||||
| 2050 Notes(3) | 3.21 | % | 1,573 | — | |||||||||||||
| 2018 Term Loan Facility(1) | 3.65 | % | — | 240 | |||||||||||||
| 2022 Term Loan Facility (1) | 1.73 | % | 200 | 199 | |||||||||||||
| 2024 Term Loan Facility(3) | 1.41 | % | 625 | — | |||||||||||||
| 2026 Term Loan Facility(3) | 1.78 | % | 625 | — | |||||||||||||
| Amortizing Notes(1) | 6.09 | % | — | 36 | |||||||||||||
| Commercial paper(4) | — | % | 200 | — | |||||||||||||
| Bank overdrafts and other | 6 | 2 | |||||||||||||||
| Total debt | 11,526 | 4,413 | |||||||||||||||
| Less: Short-term borrowings(2) | (708) | (634) | |||||||||||||||
| Total Long-term debt | $ | 10,818 | $ | 3,779 |
(1)Amount is net of unamortized discount and debt issuance costs.
(2)Includes bank borrowings, commercial paper, overdrafts and current portion of long-term debt.
(3)Assumed by the Company as part of the N&B Merger.
(4)The effective interest rate of commercial paper issuances fluctuate as short-term interest rates and demand fluctuate, and deferred debt issuance costs are immaterial. Additionally, the effective interest rate of commercial paper is not meaningful as issuances do not materially differ from short term interest rates.
Term Loan Facility and Senior Notes assumed as part of the N&B Merger
Following the Merger, the Company assumed the indebtedness incurred by N&B in the debt financings completed prior to the Distribution. This indebtedness includes (i) a Term Loan Facility of $1.250 billion pursuant to the term loan credit agreement (the "N&B Term Loan Facility") and (ii) a series of Senior Notes in the aggregate amount of $6.250 billion with maturities ranging from 2 to 30 years as further described below. N&B’s indebtedness raised prior to the Merger was used to finance the Special Cash Payment to DuPont, which has been paid, and for the satisfaction of the related transaction fees and expenses. See Note 3 for additional information.
N&B Term Loan Facility
The N&B Term Loan Facility was funded on February 1, 2021, and provides for a senior unsecured term loan credit facility in an aggregate principal amount of $1.250 billion, comprised of a $625 million three-year tranche (“2024 Term Loan Facility”) and a $625 million five-year tranche (“2026 Term Loan Facility”). Interest for each tranche equals, at the Company’s option, a per annum rate equal to either (x) an adjusted LIBOR rate plus an applicable margin varying from 0.750% to 2.000% for the three-year tranche and from 1.125% to 2.375% for the five-year tranche or (y) a base rate plus an applicable margin varying from 0.000% to 1.000% for the three-year tranche and from 0.125% to 1.375% for the five-year tranche, in each case depending on the class of IFF’s non-credit-enhanced, senior unsecured long-term debt credit rating.
The 2024 Term Loan Facility and 2026 Term Loan Facility are subject to customary affirmative and negative covenants and events of default after the Closing Date of the Merger. The 2024 Term Loan Facility and 2026 Term Loan Facility are also subject to a financial covenant requiring maintenance of a maximum consolidated leverage ratio of 4.75x until and including the end of the third full fiscal quarter after the Closing Date of the Merger, stepping down to 4.50x until and including the end of the sixth full fiscal quarter after the Closing Date of the Merger, stepping down further to 3.75x until and including the end of the ninth full fiscal quarter after the Closing Date of the Merger and stepping down further to 3.50x thereafter, with a step-up in connection with certain qualifying acquisitions. The Company was in compliance with all covenants as of September 30, 2021.
N&B Senior Notes
On September 16, 2020, N&B issued $6.250 billion in aggregate principal amount of senior unsecured notes consisting of: (i) $300 million senior unsecured notes maturing on September 15, 2022 (the “2022 Notes”), bearing interest at a rate of 0.697% per year, payable semi-annually on March 15 and September 15 of each year, beginning March 15, 2021; (ii) $1.000 billion senior unsecured notes maturing on October 1, 2025 (the “2025 Notes”), bearing interest at a rate of 1.230% per year, payable semi-annually on April 1 and October 1 of each year, beginning April 1, 2021; (iii) $1.200 billion senior unsecured notes maturing on October 15, 2027 (the “2027 Notes”), bearing interest at a rate of 1.832% per year, payable semi-annually on April 15 and October 15 of each year, beginning April 15, 2021; (iv) $1.500 billion senior unsecured notes maturing on November 1, 2030 (the “2030 Notes”), bearing interest at a rate of 2.300% per year, payable semi-annually on May 1 and November 1 of each year, beginning May 1, 2021; (v) $750 million senior unsecured notes maturing on November 15, 2040 (the “2040 Notes”), bearing interest at a rate of 3.268% per year, payable semi-annually on May 15 and November 15 of each year, beginning May 15, 2021, and; (vi) $1.500 billion senior unsecured notes maturing on December 1, 2050 (the “2050 Notes”), bearing interest at a rate of 3.468% per year, payable semi-annually on June 1 and December 1 of each year, beginning June 1, 2021.
Interest on each series of notes began accruing from September 16, 2020 payable semi-annually in arrears as described above. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months.
Redemption Provisions
The N&B Senior Notes assumed as a result of the Merger may be redeemed by the issuer at any time at the greater of 100% or the discounted present value of the remaining scheduled payments of principal and interest from the redemption date to the maturity date at Treasury Rate (as defined in the applicable indenture) plus (i) 10 basis points in the case of the 2022 Notes, (ii) 15 basis points in the case of the 2025 Notes, (iii) 25 basis points in the case of the 2027 Notes, (iv) 25 basis points in the case of the 2030 Notes, (v) 30 basis points in the case of the 2040 Notes and (vi) 30 basis points in the case of the 2050 Notes. The redemption dates of each of the N&B Senior Notes are provided in the table below:
| Notes | Redemption Date | ||||
| 2022 Notes | September 15, 2022 | ||||
| 2025 Notes | September 1, 2025 | ||||
| 2027 Notes | August 15, 2027 | ||||
| 2030 Notes | August 1, 2030 | ||||
| 2040 Notes | May 15, 2040 | ||||
| 2050 Notes | June 1, 2050 |
On or after the applicable redemption dates, each series of the N&B Senior Notes may be redeemed by the issuer at a redemption price equal to 100% of the principal amount of the N&B Senior Notes to be redeemed, plus accrued and unpaid interest on the notes to be redeemed to, but excluding, the redemption date.
2022 Term Loan Facility
On May 15, 2020, the Company entered into a Term Loan Agreement (as amended on August 25, 2020, the "2022 Term Loan Agreement") with China Construction Bank Corporation, New York Branch, as administrative agent, and the lenders party thereto for a senior unsecured two year term loan facility in an aggregate principal amount of up to $200 million (the "2022 Term Loan Facility").
The loans under the 2022 Term Loan Agreement bear interest, at the Company's option, at a per annum rate equal to either (x) an adjusted LIBOR rate plus an applicable margin varying from 1.225% to 2.475% or (y) a base rate plus an applicable margin varying from 0.225% to 1.475%, in each case depending on the public debt ratings for non-credit enhanced long-term senior unsecured debt issued by the Company. The Company may voluntarily prepay the term loans without premium or penalty, with the balance payable on the second anniversary of the funding date. There is no required amortization under the 2022 Term Loan Agreement.
As of September 30, 2021, the Company had $200 million outstanding in borrowings under the 2022 Term Loan Agreement. The 2022 Term Loan Agreement contains various covenants, limitations and events of default customary for similar facilities for similarly rated borrowers, including a maximum ratio of net debt to EBITDA of 4.75x, with step-downs over time, following the close of the N&B Merger.
Amended Debt Agreements
On July 28, 2021, the Company and certain of its subsidiaries entered into the Third Amended and Restated Credit Agreement which amended and restated the Company’s Revolving Credit Facility (previously and more recently amended and restated as of August 25, 2020) among the Company, certain of its subsidiaries, the banks, financial institutions and other institutional lenders party thereto, and Citibank, N.A. as administrative agent.
The Third Amended and Restated Revolving Credit Facility provides for, among other things, a $2.000 billion senior unsecured revolving loan credit facility maturing July 28, 2026. At the option of the Company, the facility may be increased to $2.500 billion subject to certain conditions. The Company’s maximum permitted ratio of Net Debt to Consolidated EBITDA under the Third Amended and Restated Revolving Credit Agreement will be 4.75 to 1.0, stepping down to 3.50 to 1.0 over time (with a step-up if the Company consummates certain qualifying acquisitions).
Commercial Paper
During the three months ended September 30, 2021, the Company had net issuances of $200 million under the Commercial Paper Program that were primarily used to finance debt repayments. The commercial paper issued had original maturities of less than 90 days. There were no commercial paper issuances in 2020 or in 2021 prior to the three months ended September 30, 2021.
The Commercial Paper Program is backed by the borrowing capacity available under the Revolving Credit Facility. The effective interest rate of commercial paper issuances does not materially differ from short-term interest rates, which fluctuate due to market conditions and as a result may impact our interest expense.
Debt Repayments
On September 29, 2021 and September 30, 2021, the Company made two debt repayments of $120 million each related to the 2018 Term Loan Facility. On September 25, 2021, the Company made a €300 million debt repayment related to the 2021 Euro Notes. The repayments were funded primarily from the Company's existing cash balances, with the remainder coming from the issuance of $200 million of commercial paper.
NOTE 8. LEASES
The Company has leases for corporate offices, manufacturing facilities, research and development facilities, and certain transportation and office equipment. The Company's leases have remaining lease terms of up to 40 years, some of which include options to extend the leases for up to 5 years.
The components of lease expense were as follows:
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | ||||||||||||||||||||
| (DOLLARS IN MILLIONS) | September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||||||||
| Operating lease cost | $ | 43 | $ | 13 | $ | 121 | $ | 37 | |||||||||||||||
| Finance lease cost | 2 | 1 | 4 | 3 |
Supplemental cash flow information related to leases was as follows:
| Nine Months Ended | Nine Months Ended | ||||||||||
| (DOLLARS IN MILLIONS) | September 30, 2021 | September 30, 2020 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||
| Operating cash flows for operating leases | $ | 94 | $ | 39 | |||||||
| Financing cash flows for finance leases | 3 | 2 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations | |||||||||||
| Operating leases | 69 | 37 | |||||||||
| Finance leases | 16 | 4 |
Operating lease right-of-use assets are presented in "Operating lease right-of-use assets" and financing lease right-of-use assets are presented in "Other Assets" in the Consolidated Balance Sheets. Operating lease liabilities are presented in "Operating lease liabilities" and financing lease liabilities are presented in "Other Liabilities" in the Consolidated Balance Sheets. Any other current liabilities related to operating and financing lease liabilities are presented in "Other Current Liabilities" in the Consolidated Balance Sheets.
Right-of-use assets and lease liabilities acquired from N&B were remeasured at the present value of the future minimum lease payments over the remaining lease term utilizing an updated incremental borrowing rate of the Company as if the acquired leases were new leases as of the Closing Date. Right-of-use assets were further adjusted for any off-market terms of the lease. The remaining lease term is based on the remaining term at the Closing Date plus any renewal or extension options that the Company is reasonably certain will be exercised. Additionally, the Company has elected short-term lease treatment for those acquired lease contracts which, at the Closing Date, have a remaining lease term of 12 months or less. For the leases acquired through the Transactions, the Company will retain the previous lease classification. This resulted in an increase in both right-of-use assets and operating lease liabilities of approximately $519 million as of the Closing Date.
NOTE 9. INCOME TAXES
Uncertain Tax Positions
As of September 30, 2021, the Company had $137 million of unrecognized tax benefits recorded in Other liabilities and an amount less than $1 million recorded to Other current liabilities. The balance includes $38 million associated with N&B uncertain tax positions recorded in the purchase accounting measurement period. If these unrecognized tax benefits were recognized, the effective tax rate would be affected.
As of September 30, 2021, the Company had accrued interest and penalties of $36 million classified in Other liabilities and an amount less than $1 million classified in Other current liabilities. The balance includes $21 million associated with N&B uncertain tax positions recorded in the purchase accounting measurement period.
As of September 30, 2021, the Company’s aggregate provisions for uncertain tax positions, including interest and penalties, was $174 million associated with tax positions asserted in various jurisdictions. The balance includes $59 million associated with N&B uncertain tax positions recorded in the purchase accounting measurement period.
The Company regularly repatriates earnings from non-U.S. subsidiaries. As the Company repatriates these funds to the U.S., they will be required to pay income taxes in certain U.S. states and applicable foreign withholding taxes during the period when such repatriation occurs. Accordingly, as of September 30, 2021, the Company had a deferred tax liability of $65 million for the effect of repatriating the funds to the U.S., attributable to various non-U.S. subsidiaries. There is no deferred tax liability associated with non-U.S. subsidiaries where we intend to indefinitely reinvest the earnings to fund local operations and/or capital projects.
The Company has ongoing income tax audits and legal proceedings which are at various stages of administrative or judicial review. In addition, the Company has open tax years with various taxing jurisdictions that range primarily from 2011 to 2020. Based on currently available information, the Company does not believe the outcome of any of these tax audits and other tax positions related to open tax years, when finalized, will have a material impact on its results of operations.
The Company also has other ongoing tax audits and legal proceedings that relate to indirect taxes, such as value-added taxes, sales and use taxes and property taxes, which are discussed in Note 15.
Effective Tax Rate
The effective tax rate for the three months ended September 30, 2021 was 21.2% compared to 18.1% for the three months ended September 30, 2020. The quarter-over-quarter increase was primarily due to an unfavorable mix of earnings and higher repatriation costs.
The effective tax rate for the nine months ended September 30, 2021 was 22.1% compared to 16.9% for the nine months ended September 30, 2020. The year-over-year increase was primarily due to an unfavorable mix of earnings and higher repatriation costs, partially offset by a higher level of reversals of loss provisions.
NOTE 10. STOCK COMPENSATION PLANS
The Company has various plans under which its officers, senior management, other key employees and directors may be granted equity-based awards. Equity awards outstanding under the plans include PRSUs, RSUs, SSARs and Long-Term Incentive Plan awards. Liability-based awards outstanding under the plans are cash-settled RSUs.
Stock-based compensation expense and related tax benefits were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Equity-based awards | $ | 17 | $ | 8 | $ | 44 | $ | 27 | |||||||||||||||
| Liability-based awards | — | 1 | 6 | 3 | |||||||||||||||||||
| Total stock-based compensation expense | 17 | 9 | 50 | 30 | |||||||||||||||||||
| Less: Tax benefit | (3) | (2) | (10) | (5) | |||||||||||||||||||
| Total stock-based compensation expense, after tax | $ | 14 | $ | 7 | $ | 40 | $ | 25 |
Transaction with Nutrition and Biosciences, Inc.
In connection with the Merger, N&B employees’ outstanding (unvested and/or vested and unexercised) equity awards were converted into equity awards denominated in shares of the Company’s common stock based on a defined exchange ratio. N&B employees’ equity awards were converted into 335,347 IFF stock options, 258,572 IFF RSU awards and 5,816 IFF SAR awards.
For converted RSU awards, the fair value of the equity award is based on the Closing Date market price of IFF stock. For converted stock options and SAR awards, the exercise price per share of the converted award is equal to the exercise price per share of the N&B award immediately prior to the Merger divided by the exchange ratio. The fair value of the IFF stock options and SAR awards that the Company issued in connection with the Merger was estimated using the Black Scholes model.
The converted awards were generally issued with the same terms and conditions as were applicable prior to the Transaction. At the Closing Date, approximately $25 million of the fair value of the replacement awards granted to N&B employees was attributable to pre-combination service and was included in the purchase price. As of September 30, 2021, post-combination expense of approximately $4 million is expected to be recognized related to the replacement awards over the remaining post-combination service period, approximately up to three years.
NOTE 11. SEGMENT INFORMATION
During the first quarter of 2021, the Company completed its Merger with N&B. Following the Merger, the Company reorganized its reportable segments and is now organized into four reportable operating segments: Nourish, Health & Biosciences (“H&B”), Scent and Pharma Solutions. These segments align with the internal structure to manage these businesses. The Company’s Chief Operating Decision Maker regularly reviews financial information to allocate resources and assess performance utilizing these reorganized segments. Therefore, beginning in the first quarter of 2021, the Company reported its financial performance based on its new segments. The Company recast certain prior period amounts to conform to the way the Company is internally managed and how the Company monitors segment performance during the current fiscal year. Prior to the realignment, the Company operated and managed its business as two operating and reportable segments: Taste and Scent.
Nourish combines the majority of IFF’s Taste segment and N&B’s Food & Beverage segment. It is comprised of three platforms, Ingredients, Flavors and Food Designs, with a diversified portfolio across natural and plant-based specialty food ingredients, flavor compounds, and savory solutions and inclusions, respectively. Ingredients provide texturizing solutions to the food industry, food protection solutions used in food and beverage products, specialty soy and pea protein with value-added formulations, emulsifiers and sweeteners. Flavors provide a range of flavor compounds and natural taste solutions that are ultimately used by IFF's customers in savory products, beverages, sweets, and dairy products. Flavors also provide value-added spices and seasoning ingredients for meat, food service, convenience, alternative protein and culinary products. Food Designs provide savory solution products such as spices, sauces, marinades and mixtures. Additionally, Food Designs provide inclusion products that help with taste and texture by, among other things, combining flavorings with fruit, vegetables, and other natural ingredients for a wide range of food products, such as health snacks, baked goods, cereals, pastries, ice cream and other dairy products.
Health & Biosciences is comprised of six platforms, Health, Cultures & Food Enzymes, Home & Personal Care, Animal Nutrition, Grain Processing and Microbial Control, with a biotechnology-driven portfolio of products that serve the health and wellness, food, consumer and industrial markets. Products within this portfolio range from enzymes, food cultures, probiotics and specialty ingredients for non-food applications. Health provides ingredients for dietary supplements, food and beverage, specialized nutrition and pharma. Cultures & Food Enzymes provide products that aim to serve the global demand for healthy, natural, clean label and fermented food for fresh dairy, cheese, bakery and brewing products. This is accomplished by providing IFF's customers with products that allow for extended shelf life and stability, which help to improve customers' products and performance. The platform's enzyme solution also allows IFF's customers to provide low sugar, high fiber and lactose-free dairy products. Home & Personal Care produces enzymes for detergents, cleaning and textile processing products in the laundry, dishwashing, textiles and industrials and personal care markets that help to enhance product and process performances. Animal Nutrition produces enzymes that help to improve the product and process performance of animal feed products, which aim to lessen environmental impact by reducing farm waste. Grain Processing produces enzymes for biofuel production and carbohydrate processing. Microbial Control produces biocides for controlling microbial populations for oil and gas production, home and personal care and industrial preservation markets.
Scent is comprised of (1) Fragrance Compounds, which are ultimately used by our customers in two broad categories: Fine Fragrances, including perfumes and colognes, and Consumer Fragrances, including fragrance compounds for personal care (e.g., soaps), household products (e.g., detergents and cleaning agents) and beauty care, including toiletries; (2) Fragrance Ingredients, consisting of synthetic and natural ingredients that can be combined with other materials to create unique fine fragrance and consumer compounds; and (3) Cosmetic Active Ingredients, consisting of active and functional ingredients, botanicals and delivery systems to support our customers’ cosmetic and personal care product lines. Major fragrance customers include the cosmetics industry, including perfume and toiletries manufacturers, and the household products industry, including manufacturers of soaps, detergents, fabric care, household cleaners and air fresheners.
Pharma Solutions is comprised of N&B’s historical Pharma Solutions business. Pharma Solutions is a producer of cellulosics and alginates-based pharma excipients, used to improve the functionality and delivery of active pharmaceutical ingredients, including controlled or modified drug release formulations, and enabling the development of more effective pharma solutions. The primary market for Pharma Solutions is the oral dosage pharmaceuticals excipients market.
Effective in the first quarter of 2021, management elected to change the profit or loss measure of the Company’s reportable segments from Segment Operating Profit to Segment Adjusted Operating EBITDA for internal reporting and performance measurement purposes. This change was made to enhance the transparency and visibility of the underlying operating performance of each segment. The Company's Chief Operating Decision Maker evaluates the performance of these reportable operating segments based on Segment Adjusted Operating EBITDA, which is defined as Income Before Taxes before depreciation and amortization expense, interest expense, restructuring and other charges and certain non-recurring items. Prior period amounts have been recast to reflect these changes in segment profitability measures.
Reportable segment information was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Nourish | $ | 1,662 | $ | 712 | $ | 4,638 | $ | 2,174 | |||||||||||||||
| Health & Biosciences | 618 | 31 | 1,683 | 99 | |||||||||||||||||||
| Scent | 580 | 525 | 1,699 | 1,541 | |||||||||||||||||||
| Pharma Solutions | 211 | — | 605 | — | |||||||||||||||||||
| Consolidated | $ | 3,071 | $ | 1,268 | $ | 8,625 | $ | 3,814 | |||||||||||||||
| Segment Adjusted Operating EBITDA | |||||||||||||||||||||||
| Nourish | $ | 327 | $ | 148 | $ | 921 | $ | 466 | |||||||||||||||
| Health & Biosciences | 151 | 10 | 469 | 29 | |||||||||||||||||||
| Scent | 130 | 118 | 375 | 323 | |||||||||||||||||||
| Pharma Solutions | 40 | — | 131 | — | |||||||||||||||||||
| Total | 648 | 276 | 1,896 | 818 | |||||||||||||||||||
| Depreciation & Amortization | (297) | (83) | (861) | (244) | |||||||||||||||||||
| Interest Expense | (74) | (35) | (216) | (99) | |||||||||||||||||||
| Other income (expense), net | 26 | (10) | 44 | (5) | |||||||||||||||||||
| Frutarom Integration Related Costs (a) | (1) | (2) | (3) | (9) | |||||||||||||||||||
| Restructuring and Other Charges | (6) | (1) | (34) | (8) | |||||||||||||||||||
| Gains (Losses) on Sale of Assets | 1 | (1) | 1 | (2) | |||||||||||||||||||
| Shareholder Activism Related Costs (b) | — | — | (7) | — | |||||||||||||||||||
| Business Divestiture Costs (c) | (16) | — | (21) | — | |||||||||||||||||||
| Employee Separation Costs (d) | (22) | — | (28) | — | |||||||||||||||||||
| Frutarom Acquisition Related Costs (e) | — | (1) | — | (1) | |||||||||||||||||||
| Compliance Review & Legal Defense Costs (f) | — | (1) | — | (2) | |||||||||||||||||||
| N&B Inventory Step-Up Costs | 14 | — | (363) | — | |||||||||||||||||||
| N&B Transaction Related Costs (g) | — | (8) | (91) | (24) | |||||||||||||||||||
| N&B Integration Related Costs (h) | (23) | (29) | (77) | (62) | |||||||||||||||||||
| Income Before Taxes | $ | 250 | $ | 105 | $ | 240 | $ | 362 | |||||||||||||||
| (a) | Represents costs related to the integration of the Frutarom acquisition. For 2021, costs primarily related to performance stock awards. For 2020, costs primarily related to advisory services, retention bonuses and performance stock awards. | ||||
| (b) | Represents shareholder activist related costs, primarily professional fees. | ||||
| (c) | Represents costs related to the Company's planned sales of businesses, primarily legal and professional fees. | ||||
| (d) | Represents costs related to severance, including accelerated stock compensation expense, for certain employees and executives who have been separated or will separate from the Company. | ||||
| (e) | Represents transaction-related costs and expenses related to the acquisition of Frutarom. For 2020, amount primarily includes earn-out payments, net of adjustments, amortization for inventory "step-up" costs and transaction costs principally related to the 2019 Acquisition Activity. | ||||
| (f) | Costs related to reviewing the nature of inappropriate payments and review of compliance in certain other countries. In addition, includes legal costs for related shareholder lawsuits. | ||||
| (g) | Represents transaction costs and expenses related to the transaction with N&B, primarily includes legal and professional fees. | ||||
| (h) | Represents costs primarily related to advisory services for the integration of the transaction with N&B, primarily consulting fees. | ||||
Net sales, which are attributed to individual regions based upon the destination of product delivery, were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Europe, Africa and Middle East | $ | 1,084 | $ | 481 | $ | 3,041 | $ | 1,487 | |||||||||||||||
| Greater Asia | 696 | 283 | 1,990 | 868 | |||||||||||||||||||
| North America | 925 | 321 | 2,608 | 925 | |||||||||||||||||||
| Latin America | 366 | 183 | 986 | 534 | |||||||||||||||||||
| Consolidated | $ | 3,071 | $ | 1,268 | $ | 8,625 | $ | 3,814 |
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net sales related to the U.S. | $ | 860 | $ | 286 | $ | 2,390 | $ | 825 | |||||||||||||||
| Net sales attributed to all foreign countries | 2,211 | 982 | 6,235 | 2,989 |
No non-U.S. country had net sales greater than 6% of total consolidated net sales for the three and nine months ended September 30, 2021.
NOTE 12. EMPLOYEE BENEFITS
Pension and other defined contribution retirement plan expenses included the following components:
| (DOLLARS IN MILLIONS) | U.S. Plans | ||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Service cost for benefits earned(1) | $ | — | $ | — | $ | 1 | $ | 1 | |||||||||||||||
| Interest cost on projected benefit obligation(2) | 62 | 4 | 68 | 12 | |||||||||||||||||||
| Expected return on plan assets(2) | (92) | (7) | (102) | (21) | |||||||||||||||||||
| Net amortization and deferrals(2) | 23 | 2 | 27 | 6 | |||||||||||||||||||
| Net periodic benefit (income) cost | $ | (7) | $ | (1) | $ | (6) | $ | (2) |
| (DOLLARS IN MILLIONS) | Non-U.S. Plans | ||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Service cost for benefits earned(1) | $ | 10 | $ | 6 | $ | 32 | $ | 18 | |||||||||||||||
| Interest cost on projected benefit obligation(2) | 3 | 3 | 8 | 9 | |||||||||||||||||||
| Expected return on plan assets(2) | (19) | (12) | (44) | (35) | |||||||||||||||||||
| Net amortization and deferrals(2) | 5 | 4 | 15 | 12 | |||||||||||||||||||
| Net periodic benefit (income) cost | $ | (1) | $ | 1 | $ | 11 | $ | 4 |
(1)Included as a component of Operating profit.
(2)Included as a component of Other (income) expense, net.
The amounts of interest cost, expected return and net amortization and deferrals have been updated to reflect the correction of certain prior period amounts. The aggregate amount of the correction was approximately $17 million for the three and nine months ended September 30, 2021.
The Company expects to contribute a total of $4 million to its U.S. pension plans and a total of $25 million to its non-U.S. pension plans during 2021. During the nine months ended September 30, 2021, no contributions were made to the qualified U.S. pension plans, $18 million of contributions were made to the non-U.S. pension plans, and $3 million of benefit payments were made with respect to the Company's non-qualified U.S. pension plan.
Income (expense) recognized for postretirement benefits other than pensions included the following components:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Interest cost on projected benefit obligation | $ | 6 | $ | — | $ | 7 | $ | 1 | |||||||||||||||
| Net amortization and deferrals | (16) | (1) | (18) | (3) | |||||||||||||||||||
| Total postretirement benefit income | $ | (10) | $ | (1) | $ | (11) | $ | (2) |
The Company expects to contribute $4 million to its postretirement benefits other than pension plans during 2021. In the nine months ended September 30, 2021, $3 million of contributions were made.
NOTE 13. FINANCIAL INSTRUMENTS
Fair Value
Accounting guidance on fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy:
-
Level 1 — Quoted prices for identical instruments in active markets.
-
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
-
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable*.*
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company determines the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) using the London Interbank Offer Rate ("LIBOR") swap curve and forward interest and exchange rates at period end. Such instruments are classified as Level 2 based on the observability of significant inputs to the model. The Company does not have any instruments classified as Level 3, other than those included in pension asset trusts as discussed in Note 16 of the Company's 2020 Form 10-K.
These valuations take into consideration the Company's credit risk and its counterparties’ credit risk. The estimated change in the fair value of these instruments due to such changes in its own credit risk (or instrument-specific credit risk) was not material as of September 30, 2021.
The carrying values and the estimated fair values of financial instruments at September 30, 2021 and December 31, 2020 consisted of the following:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| (DOLLARS IN MILLIONS) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
| LEVEL 1 | |||||||||||||||||||||||
| Cash and cash equivalents(1) | $ | 672 | $ | 672 | $ | 650 | $ | 650 | |||||||||||||||
| 2025 Notes(6) | 1,001 | 993 | — | — | |||||||||||||||||||
| 2027 Notes(6) | 1,219 | 1,199 | — | — | |||||||||||||||||||
| 2030 Notes(6) | 1,511 | 1,490 | — | — | |||||||||||||||||||
| 2040 Notes(6) | 775 | 773 | — | — | |||||||||||||||||||
| 2050 Notes(6) | 1,573 | 1,583 | — | — | |||||||||||||||||||
| LEVEL 2 | |||||||||||||||||||||||
| Credit facilities and bank overdrafts(2) | 6 | 6 | 2 | 2 | |||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Derivative assets(3) | 2 | 2 | 1 | 1 | |||||||||||||||||||
| Derivative liabilities(3) | 10 | 10 | 29 | 29 | |||||||||||||||||||
| Commercial paper (2) | 200 | 200 | — | — | |||||||||||||||||||
| Long-term debt:(4) | |||||||||||||||||||||||
| 2021 Euro Notes | — | — | 368 | 370 | |||||||||||||||||||
| 2022 Notes | 300 | 301 | — | — | |||||||||||||||||||
| 2023 Notes | 300 | 311 | 299 | 316 | |||||||||||||||||||
| 2024 Euro Notes | 584 | 608 | 614 | 648 | |||||||||||||||||||
| 2026 Euro Notes | 930 | 1,002 | 978 | 1,061 | |||||||||||||||||||
| 2028 Notes | 397 | 463 | 397 | 472 | |||||||||||||||||||
| 2047 Notes | 494 | 592 | 494 | 608 | |||||||||||||||||||
| 2048 Notes | 786 | 1,038 | 786 | 1,059 | |||||||||||||||||||
| 2018 Term Loan Facility(2) | — | — | 240 | 240 | |||||||||||||||||||
| 2022 Term Loan Facility(2) | 200 | 200 | 199 | 200 | |||||||||||||||||||
| 2024 Term Loan Facility(7) | 625 | 625 | — | — | |||||||||||||||||||
| 2026 Term Loan Facility(7) | 625 | 625 | — | — | |||||||||||||||||||
| Amortizing Notes(5) | — | — | 36 | 37 |
(1)The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those instruments.
(2)The carrying amount approximates fair value as the interest rate is reset frequently based on current market rates as well as the short maturity of those instruments.
(3)The carrying amount approximates fair value as the instruments are marked-to-market and held at fair value on the Consolidated Balance Sheets.
(4)The fair value of the Company's long-term debt was calculated using discounted cash flows applying current interest rates and current credit spreads based on its own credit risk.
(5)The fair value of the Amortizing Notes of the TEUs was based on the most recently quoted price for the outstanding securities, adjusted for any known significant deviation in value. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange.
(6)The fair value of the Notes is based on market quoted price as there is an active market for the Notes and observable market data and inputs.
(7)The carrying amount approximates fair value as the Term Loans were assumed at fair value and the interest rate is reset frequently based on current market rates.
Derivatives
Foreign Currency Forward Contracts
The Company periodically enters into foreign currency forward contracts with the objective of reducing exposure to cash flow volatility associated with its intercompany loans, foreign currency receivables and payables and anticipated purchases of certain raw materials used in operations. These contracts generally involve the exchange of one currency for a second currency at a future date, have maturities not exceeding twelve months and are with counterparties which are major international financial institutions.
Commodity Contracts
The Company utilizes options, futures and swaps that are not designated as hedging instruments to reduce exposure to commodity price fluctuations on purchases of inventory such as soybeans, soybean oil and soybean meal.
Cash Flow Hedges
The Company maintains several forward currency contracts which qualified as cash flow hedges. The objective of these hedges is to protect against the currency risk associated with forecasted U.S. dollar ("USD") denominated raw material purchases made by Euro ("EUR") functional currency entities which result from changes in the EUR/USD exchange rate. The effective portions of cash flow hedges are recorded in OCI as a component of Gains (losses) on derivatives qualifying as hedges in the accompanying Consolidated Statements of Income and Comprehensive (Loss) Income. Realized gains/(losses) in AOCI related to cash flow hedges of raw material purchases are recognized as a component of Cost of goods sold in the accompanying Consolidated Statements of Income and Comprehensive (Loss) Income in the same period as the related costs are recognized.
Hedges Related to Issuances of Debt
Subsequent to the issuance of the 2021 Euro Notes and 2026 Euro Notes during the third quarter of 2018, the Company designated the debt as a hedge of a portion of its net European investments. Accordingly, the change in the value of the debt that is attributable to foreign exchange movements is recorded in OCI as a component of foreign currency translation adjustments in the accompanying Consolidated Statements of Income and Comprehensive (Loss) Income.
Subsequent to the issuance of the 2024 Euro Notes during the first quarter of 2016, the Company designated the debt as a hedge of a portion of its net European investments. Accordingly, the change in the value of the debt that is attributable to foreign exchange movements is recorded in OCI as a component of foreign currency translation adjustments in the accompanying Consolidated Statements of Income and Comprehensive (Loss) Income.
Cross Currency Swaps
During the third quarter of 2019, the Company entered into four EUR/USD cross currency swaps that mature through May 2023. The swaps all qualified as net investment hedges in order to mitigate a portion of the Company's net European investments from foreign currency risk. During the third quarter of 2020, the Company entered into a transaction to unwind two of the swaps issued in the third quarter of 2019 and paid proceeds of $15 million, net of accrued interest receivable of $2 million. The loss arising from the termination of the swaps has been included as a component of accumulated other comprehensive loss. As of September 30, 2021, the two remaining swaps were in a net liability position with an aggregate fair value of $9 million which was classified as other current liabilities. Changes in fair value related to cross currency swaps are recorded in OCI.
The following table shows the notional amount of the Company’s derivative instruments outstanding as of September 30, 2021 and December 31, 2020:
| (DOLLARS IN MILLIONS) | September 30, 2021 | December 31, 2020 | |||||||||
| Foreign currency contracts | $ | 53 | $ | 221 | |||||||
| Commodity contracts | 23 | — | |||||||||
| Cross currency swaps | 300 | 300 |
The following tables show the Company’s derivative instruments measured at fair value (Level 2 of the fair value hierarchy), as reflected in the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | |||||||||||||||||
| (DOLLARS IN MILLIONS) | Fair Value of Derivatives Designated as Hedging Instruments | Fair Value of Derivatives Not Designated as Hedging Instruments | Total Fair Value | ||||||||||||||
| Derivative assets(1) | |||||||||||||||||
| Foreign currency contracts | $ | — | $ | 2 | $ | 2 | |||||||||||
| Derivative liabilities(2) | |||||||||||||||||
| Foreign currency contract | $ | — | $ | 1 | $ | 1 | |||||||||||
| Cross currency swaps | 9 | — | 9 | ||||||||||||||
| Total derivative liabilities | $ | 9 | $ | 1 | $ | 10 |
| December 31, 2020 | |||||||||||||||||
| (DOLLARS IN MILLIONS) | Fair Value of Derivatives Designated as Hedging Instruments | Fair Value of Derivatives Not Designated as Hedging Instruments | Total Fair Value | ||||||||||||||
| Derivative assets(1) | |||||||||||||||||
| Foreign currency contracts | $ | — | $ | 1 | $ | 1 | |||||||||||
| Derivative liabilities(2) | |||||||||||||||||
| Foreign currency contracts | $ | 6 | $ | — | $ | 6 | |||||||||||
| Cross currency swaps | 23 | — | 23 | ||||||||||||||
| Total derivative liabilities | $ | 29 | $ | — | $ | 29 |
(1)Derivative assets are recorded to Prepaid expenses and other current assets in the Consolidated Balance Sheets.
(2)Derivative liabilities are recorded to Other current liabilities in the Consolidated Balance Sheets.
The following table shows the effect of the Company’s derivative instruments which were not designated as hedging instruments in the Consolidated Statements of Income and Comprehensive (Loss) Income for the three and nine months ended September 30, 2021 and 2020 (in millions):
| Amount of Gain (Loss) | Location of Gain (Loss) Recognized in Income on Derivative | ||||||||||||||||
| (DOLLARS IN MILLIONS) | Three Months Ended September 30, | ||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Foreign currency contracts(1) | $ | — | $ | 5 | Other (income) expense, net | ||||||||||||
| Amount of Gain (Loss) | Location of Gain (Loss) Recognized in Income on Derivative | ||||||||||||||||
| (DOLLARS IN MILLIONS) | Nine Months Ended September 30, | ||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Foreign currency contracts(1) | $ | 5 | $ | 1 | Other (income) expense, net | ||||||||||||
(1)The foreign currency contract net gains (losses) offset any recognized gains (losses) arising from the revaluation of the related intercompany loans during the same respective periods.
The following table shows the effect of the Company’s derivative and non-derivative instruments designated as cash flow and net investment hedging instruments, net of tax, in the Consolidated Statements of Income and Comprehensive (Loss) Income for the three and nine months ended September 30, 2021 and 2020 (in millions):
| Amount of Gain (Loss) Recognized in OCI on Derivative | Location of Gain (Loss) Reclassified from AOCI into Income | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income | |||||||||||||||||||||||||||
| Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships: | |||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 1 | $ | (5) | Cost of goods sold | $ | (1) | $ | 2 | ||||||||||||||||||||
| Interest rate swaps (1) | — | 1 | Interest expense | — | (1) | ||||||||||||||||||||||||
| Derivatives in Net Investment Hedging Relationships: | |||||||||||||||||||||||||||||
| Cross currency swaps | 5 | (8) | N/A | — | — | ||||||||||||||||||||||||
| Non-Derivatives in Net Investment Hedging Relationships: | |||||||||||||||||||||||||||||
| 2024 Euro Notes | 9 | (19) | N/A | — | — | ||||||||||||||||||||||||
| 2021 Euro Notes & 2026 Euro Notes | 20 | (40) | N/A | — | — | ||||||||||||||||||||||||
| Total | $ | 35 | $ | (71) | $ | (1) | $ | 1 | |||||||||||||||||||||
| Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) | Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |||||||||||||||||||||||||||
| Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships: | |||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 7 | $ | (7) | Cost of goods sold | $ | (5) | $ | 5 | ||||||||||||||||||||
| Interest rate swaps (1) | — | 1 | Interest expense | — | (1) | ||||||||||||||||||||||||
| Derivatives in Net Investment Hedging Relationships: | |||||||||||||||||||||||||||||
| Cross currency swaps | 11 | (2) | N/A | — | — | ||||||||||||||||||||||||
| Non-Derivatives in Net Investment Hedging Relationships: | |||||||||||||||||||||||||||||
| 2024 Euro Notes | 23 | (20) | N/A | — | — | ||||||||||||||||||||||||
| 2021 Euro Notes & 2026 Euro Notes | 52 | (43) | N/A | — | — | ||||||||||||||||||||||||
| Total | $ | 93 | $ | (71) | $ | (5) | $ | 4 |
(1)Interest rate swaps were entered into as pre-issuance hedges for bond offerings.
The ineffective portion of the above noted cash flow hedges were not material during the three and nine months ended September 30, 2021 and 2020.
At September 30, 2021, based on current market rates, the Company does not expect any derivative losses (net of tax), included in AOCI, to be reclassified into earnings within the next 12 months.
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present changes in the accumulated balances for each component of other comprehensive (loss) income, including current period other comprehensive (loss) income and reclassifications out of accumulated other comprehensive loss:
| (DOLLARS IN MILLIONS) | Foreign Currency Translation Adjustments | Gains (Losses) on Derivatives Qualifying as Hedges | Pension and Postretirement Liability Adjustment | Total | |||||||||||||||||||
| Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2020 | $ | (285) | $ | (7) | $ | (406) | $ | (698) | |||||||||||||||
| OCI before reclassifications | (493) | 2 | — | (491) | |||||||||||||||||||
| Amounts reclassified from AOCI | — | 5 | 4 | 9 | |||||||||||||||||||
| Net current period other comprehensive income (loss) | (493) | 7 | 4 | (482) | |||||||||||||||||||
| Accumulated other comprehensive (loss) income, net of tax, as of September 30, 2021 | $ | (778) | $ | — | $ | (402) | $ | (1,180) |
| (DOLLARS IN MILLIONS) | Foreign Currency Translation Adjustments | Gains (Losses) on Derivatives Qualifying as Hedges | Pension and Postretirement Liability Adjustment | Total | |||||||||||||||||||
| Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2019 | $ | (373) | $ | 2 | $ | (346) | $ | (717) | |||||||||||||||
| OCI before reclassifications | (226) | (2) | — | (228) | |||||||||||||||||||
| Amounts reclassified from AOCI | — | (4) | 10 | 6 | |||||||||||||||||||
| Net current period other comprehensive income (loss) | (226) | (6) | 10 | (222) | |||||||||||||||||||
| Accumulated other comprehensive (loss) income, net of tax, as of September 30, 2020 | $ | (599) | $ | (4) | $ | (336) | $ | (939) |
The following table provides details about reclassifications out of Accumulated other comprehensive loss to the Consolidated Statements of Income and Comprehensive (Loss) Income:
| Nine Months Ended September 30, | Affected Line Item in the Consolidated Statements of Income and Comprehensive (Loss) Income | ||||||||||||||||
| (DOLLARS IN MILLIONS) | 2021 | 2020 | |||||||||||||||
| Gains (losses) on derivatives qualifying as hedges | |||||||||||||||||
| Foreign currency contracts | $ | (6) | $ | 5 | Cost of goods sold | ||||||||||||
| Tax | 1 | (1) | Provision for income taxes | ||||||||||||||
| Total | $ | (5) | $ | 4 | Total, net of income taxes | ||||||||||||
| Losses on pension and postretirement liability adjustments | |||||||||||||||||
| Prior service cost | $ | 5 | $ | (13) | (1) | ||||||||||||
| Actuarial losses | (27) | — | (1) | ||||||||||||||
| Other items | 17 | — | (2) | ||||||||||||||
| Tax | 1 | 3 | Provision for income taxes | ||||||||||||||
| Total | $ | (4) | $ | (10) | Total, net of income taxes |
(1)The amortization of prior service cost and actuarial loss is included in the computation of net periodic benefit cost. Refer to Note 16 of the Company's 2020 Form 10-K for additional information regarding net periodic benefit cost.
(2)Represents certain amounts of pension income that were corrected in the current year. Refer to Note 12 for additional information.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Guarantees and Letters of Credit
The Company has various bank guarantees, letters of credit and surety bonds which are used to support its ongoing business operations, satisfy governmental requirements associated with pending litigation in various jurisdictions and the payment of customs duties.
At September 30, 2021, the Company had total bank guarantees, commercial guarantees, standby letters of credit and surety bonds of $381 million with various financial institutions. Included in the above aggregate amount was a total of $14 million for other assessments in Brazil for various income tax and indirect tax disputes related to fiscal years 1998-2011. There was a total of approximately $25 million outstanding under the bank guarantees and standby letters of credit and approximately $84 million outstanding under the commercial guarantees as of September 30, 2021.
In order to challenge the assessments in these cases in Brazil, the Company has been required to, and has separately pledged assets, principally property, plant and equipment, to cover assessments in the amount of $7 million as of September 30, 2021.
Lines of Credit
The Company has various lines of credit which are available to support its ongoing business operations. As of September 30, 2021, the Company had available lines of credit of $1.428 billion with various financial institutions, in addition to the $1.718 billion of capacity under the Credit Facility. There were total draw downs of approximately $229 million pursuant to these lines of credit as of September 30, 2021, including approximately $200 million related to the issuance of commercial paper.
Litigation
The Company assesses contingencies related to litigation and/or other matters to determine the degree of probability and range of possible loss. A loss contingency is accrued in the Company’s Consolidated Financial Statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly sensitive and requires judgments about future events. On at least a quarterly basis, the Company reviews contingencies related to litigation to determine the adequacy of accruals. The amount of ultimate loss may differ from these estimates and further events may require the Company to increase or decrease the amounts it has accrued on any matter.
Periodically, the Company assesses its insurance coverage for all known claims, where applicable, taking into account aggregate coverage by occurrence, limits of coverage, self-insured retentions and deductibles, historical claims experience and claims experience with its insurance carriers. The liabilities are recorded at management’s best estimate of the probable outcome of the lawsuits and claims, taking into consideration the facts and circumstances of the individual matters as well as past experience on similar matters. At each balance sheet date, the key issues that management assesses are whether it is probable that a loss as to asserted or unasserted claims has been incurred and if so, whether the amount of loss can be reasonably estimated. The Company records the expected liability with respect to claims in Other liabilities and expected recoveries from its insurance carriers in Other assets. The Company recognizes a receivable when it believes that realization of the insurance receivable is probable under the terms of the insurance policies and its payment experience to date.
Litigation Matters
On August 12, 2019, Marc Jansen filed a putative securities class action against IFF, its Chairman and CEO, and its then-CFO, in the United States District Court for the Southern District of New York. The lawsuit was filed after IFF disclosed that preliminary results of investigations indicated that Frutarom businesses operating principally in Russia and Ukraine had made improper payments to representatives of customers. On March 16, 2020, an amended complaint was filed, which added Frutarom and certain former officers of Frutarom as defendants. The amended complaint alleges, among other things, that defendants made materially false and misleading statements or omissions concerning IFF’s acquisition of Frutarom, the integration of the two companies, and the companies’ financial reporting and results. The amended complaint asserts claims under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and under the Israeli Securities Act-1968, against all defendants, and under Section 20(a) of the Securities Exchange Act of 1934 against the individual defendants, on behalf of a putative class of persons and entities who purchased or otherwise acquired IFF securities on the New York Stock Exchange between May 7, 2018 and August 12, 2019 and persons and entities who purchased or otherwise acquired IFF securities on the Tel Aviv Stock Exchange between October 9, 2018 and August 12, 2019. The amended complaint seeks an award of unspecified compensatory damages, costs, and expenses. IFF, its officers, and Frutarom filed a motion to dismiss the case on June 26, 2020, which was granted on March 30, 2021. On April 28, 2021, lead plaintiffs filed a notice of appeal to the
United States Court of Appeals for the Second Circuit. Lead plaintiffs are pursuing the appeal only against Frutarom and certain former officers of Frutarom. The parties have submitted their briefs to the Court of Appeals.
Two motions to approve securities class actions were filed in the Tel Aviv District Court, Israel, in August 2019, similarly alleging, among other things, false and misleading statements largely in connection with IFF’s acquisition of Frutarom and the above-mentioned improper payments. One motion ("Borg") asserts claims under the U.S. federal securities laws against IFF, its Chairman and CEO, and its former CFO. On November 8, 2020, IFF and its officers filed their response to the Borg motion. On April 20, 2021, Mr. Borg filed a motion to stay the proceeding pending an appellate decision in the U.S. proceeding. On June 15, 2021 and August 11, 2021, the U.S. lead plaintiffs filed update notices with the Israeli court regarding the appeal in the U.S. proceeding. The other motion ("Oman") (following an initial amendment) asserted claims under the Israeli Securities Act-1968 against IFF, its Chairman and CEO, and its former CFO, and against Frutarom and certain former Frutarom officers and directors, as well as claims under the Israeli Companies Act-1999 against certain former Frutarom officers and directors. On February 17, 2021, the court granted a motion by the Oman plaintiff to remove IFF and its officers from the motion and to add factual allegations from the US amended complaint. The amended Oman motion was filed on July 4, 2021. On August 29, 2021, the former Frutarom officers and certain former Frutarom directors filed a motion to dismiss the case. On September 30, 2021, Frutarom notified the court that it joins the legal arguments made in the motion to dismiss.
On October 29, 2019, IFF and Frutarom filed a claim in the Tel Aviv District Court, Israel, against Ori Yehudai, the former President and CEO of Frutarom, and against certain former directors of Frutarom, challenging the bonus of US $20 million granted to Yehudai in 2018. IFF and Frutarom allege, among other things, that Yehudai was not entitled to receive the bonus because he breached his fiduciary duty by, among other things, knowing of the above-mentioned improper payments and failing to prevent them from being made. The parties agreed, pursuant to the court’s recommendation, to attempt to resolve the dispute through mediation, and a court decision is pending with regard to the order in which this claim and the class action described below will be heard.
On March 11, 2020, an IFF shareholder filed a motion to approve a class action in Israel against, among others, Frutarom, Yehudai, and Frutarom’s former board of directors, alleging that former minority shareholders of Frutarom were harmed as a result of the US $20 million bonus paid to Yehudai. The parties to this motion agreed to attempt to resolve the dispute through mediation to take place regarding the aforesaid claim against Yehudai. On July 27, 2021, counsel to the movant in the class action filed a notice with the court that the mediation process ended without an agreement. On August 26, 2021, a motion to dismiss the class action application was filed by Yehudai and certain former directors of Frutarom. On September 9, 2021, an additional motion to dismiss was filed by other former directors of Frutarom together with ICC Industries, Inc. and its affiliates.
Investigation
On June 3, 2020, the Israel Police’s National Fraud Investigation Unit and the Israeli Securities Authority commenced an investigation into Frutarom and certain of its former executives, based on suspected bribery of foreign officials, money laundering, and violations of the Israeli Securities Act-1968. As part of the investigation, the National Fraud Investigation Unit and the Israeli Securities Authority have provided IFF and Frutarom with various orders, mainly requesting that IFF and Frutarom provide certain documents and materials. In addition, a seizure of assets was imposed on Frutarom and certain of its affiliates. IFF has been working to ensure compliance with such orders, all in accordance with, and subject to, Israeli law. On August 25, 2021, the Israeli Police informed Frutarom that they have decided to remove the temporary criminal seizure of assets order from the real estate assets of Frutarom and its related companies, which was done in parallel with the transfer of the case to the District Attorney's Office in Israel.
China Facilities
Guangzhou Taste plant
During the fourth quarter of 2016, the Company was notified that certain governmental authorities have begun to evaluate a change in the zoning of the Guangzhou Taste plant. The zoning, if changed, would prevent the Company from continuing to manufacture product at the existing plant. The ultimate outcome of any change that the governmental authorities may propose, the timing of such a change, and the nature of any compensation arrangements that might be provided to the Company are uncertain. To address the governmental authorities' requirements, the Company has begun to transfer certain production capabilities from the Guangzhou Taste plant to a newly built facility in Zhangjiagang.
The net book value of the plant in Guangzhou was approximately $60 million as of September 30, 2021.
Guangzhou Scent plant
During the second quarter of 2019, the Company was notified that certain governmental authorities had changed the zoning where the Guangzhou Scent plant is located. The zoning change did not affect the current operations but prevents expansions or other increases in the operating capacity of the plant. The Company believes that it is possible that the zoning may be enforced in the future such that it would not be able to continue manufacturing at the existing site. The ultimate outcome of any change that the governmental authorities may propose, the timing of such a change, and the nature of any compensation arrangements that might be provided to the Company are uncertain.
The net book value of the existing plant was approximately $9 million as of September 30, 2021.
Zhejiang Ingredients plant
In the fourth quarter of 2017, the Company concluded discussions with the government regarding the relocation of its Fragrance Ingredients plant in Zhejiang and, based on the agreements reached, expects to receive total compensation payments up to approximately $50 million. The relocation compensation will be paid to the Company over the period of the relocation which is expected to be through the end of 2022. The Company received payments totaling $30 million through the end of 2019. In the third quarter of 2020, the Company received a payment of approximately $13 million. A final payment is expected to be received upon completion of the final environmental inspection.
Production at the facility ceased during 2019. In the second quarter of 2020, the Company transferred ownership of the site to the government. The land remediation activities are in progress and are expected to be completed in the second half of 2022. During the second quarter of 2020, the remaining net book value of the plant was written off.
Total China Operations
The total net book value of all plants in China was approximately $284 million as of September 30, 2021.
If the Company is required to close a plant, or operate one at significantly reduced production levels on a permanent basis, the Company may be required to record charges that could have a material impact on its consolidated financial results of operations, financial position and cash flows in future periods.
Other Contingencies
The Company has contingencies involving third parties (such as labor, contract, technology or product-related claims or litigation) as well as government-related items in various jurisdictions in which it operates pertaining to such items as value-added taxes, other indirect taxes, customs and duties and sales and use taxes. It is possible that cash flows or results of operations, in any period, could be materially affected by the unfavorable resolution of one or more of these contingencies.
The most significant government-related contingencies exist in Brazil. With regard to the Brazilian matters, the Company believes it has valid defenses for the underlying positions under dispute; however, in order to pursue these defenses, the Company is required to, and has provided, bank guarantees and pledged assets in the aggregate amount of $21 million. The Brazilian matters take an extended period of time to proceed through the judicial process and there are a limited number of rulings to date.
Brazil Tax Credits
In January 2020, the Company was informed of a favorable ruling from the Brazilian tax authorities confirming that the Company was entitled to recover the overpayments of certain indirect taxes (known as PIS/COFINS) for the period from November 2011 to December 2018, plus interest on the amount of the overpayments. The overpayments arose from the inclusion of a value added tax known as ICMS in the calculation of the PIS/COFINS tax. The ruling did not, however, settle the question of whether the Company is eligible to recover overpayments based on the gross or the net amount of ICMS amounts paid on PIS/COFINS. The Company calculated the amount of overpayments using the gross method which yields a higher amount than the application of the net method. A final ruling on the gross versus net amount issue was made by the Brazilian Supreme Court who affirmed the use of the gross calculation with respect to claims submitted prior to March 2017. Although the Company had not submitted a claim until after March 2017, the Company believes that the Supreme Court, whilst confirming the use of the gross method of calculation, does not override the January 2020 ruling by the Brazilian tax authorities with respect to the timeframe for the calculation.
In addition to the $8 million recognized in the fourth quarter of 2019, during the first quarter of 2020 the Company recognized $4 million as an additional recovery on the existing claim. During 2020, the Company also recognized $3 million related to a claim from another of its subsidiaries in Brazil. The income was recognized as a reduction in Selling and Administrative expenses.
Avicel® PH NF (Pharma Solutions)
The Company has determined that certain grades of microcrystalline cellulose (Avicel® PH NF 101, 102, and 200) produced between April and November 2020 had elevated conductivity levels and thus were out-of-specification (collectively, “OOS Avicel® PH NF”). The Company does not expect this issue to affect the functionality of Avicel® PH NF or to pose a human health hazard. Corrective actions have been implemented to improve operational and laboratory conditions. On August 5, 2021, IFF issued a voluntary recall in the U.S. for the unused OOS Avicel® PH NF. Based on the information available as of September 30, 2021, the Company has accrued approximately $35 million based on the current estimate of costs associated with this issue. The total amount of exposure may increase as additional customers present claims.
Other
The Company determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that either a loss is reasonably possible or a loss in excess of accrued amounts is reasonably possible and the amount of losses or range of losses is determinable. For all third party contingencies (including labor, contract, technology, tax, product-related claims and business litigation), the Company currently estimates that the aggregate range of reasonably possible losses in excess of any accrued liabilities is $0 to approximately $57 million. The estimates included in this amount are based on the Company’s analysis of currently available information and, as new information is obtained, these estimates may change. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the matters in question. Thus, the Company’s exposure and ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued or the range disclosed above.
NOTE 16. REDEEMABLE NONCONTROLLING INTERESTS
Through certain subsidiaries of our Frutarom acquisition, there are certain noncontrolling interests that carry redemption features. The noncontrolling interest holders have the right, over a stipulated period of time, to sell their respective interests to Frutarom, and Frutarom has the option to purchase these interests (subject to the same timing). These options carry identical price and conditions of exercise, and will be settled based on the multiple of the average EBITDA of consecutive quarters to be achieved during the period ending prior to the exercise date.
The following table sets forth the details of the Company's redeemable noncontrolling interests:
| (DOLLARS IN MILLIONS) | Redeemable Noncontrolling Interests | ||||
| Balance at December 31, 2019 | $ | 99 | |||
| Impact of foreign exchange translation | 17 | ||||
| Share of profit or loss attributable to redeemable noncontrolling interests | 3 | ||||
| Redemption value adjustment for the current period | (5) | ||||
| Measurement period adjustments | (1) | ||||
| Dividends paid | (2) | ||||
| Exercises of redeemable noncontrolling interests | (11) | ||||
| Balance at September 30, 2020 | $ | 100 | |||
| Balance at December 31, 2020 | $ | 98 | |||
| Impact of foreign exchange translation | 2 | ||||
| Share of profit or loss attributable to redeemable noncontrolling interests | 4 | ||||
| Redemption value adjustment for the current period | 1 | ||||
| Balance at September 30, 2021 | $ | 105 |
For 2020, the increase in redeemable noncontrolling interests was primarily due to the impact of foreign exchange translation offset by the exercise of options.
During 2020, the Company paid approximately $14 million related to the purchase of certain noncontrolling interests where the option related to the purchase had been exercised in the fourth quarter of 2019.
For 2021, the increase in redeemable noncontrolling interests was primarily due to profits attributable to redeemable noncontrolling interests.
NOTE 17. ASSETS HELD FOR SALE
Microbial Control
During the third quarter of 2021, the Company announced it had entered into an agreement to sell its Microbial Control business unit, which is a part of the Health & Biosciences segment. The Company acquired the Microbial Control business unit as part of the merger with N&B.
The Company classifies assets as "held for sale" when, among other factors, management approves and commits to a formal plan of sale with the expectation the sale will be completed within one year. Pursuant to ASC 360, assets held for sale were recorded at the lower of carrying value or the fair market value, less costs to sell. The sale does not constitute a strategic shift of the Company’s operations and does not, and will not, have major effects on the Company’s operations and financial results; therefore, the transaction does not meet the discontinued operations criteria.
Based on the agreement to sell, it was determined that the assets and liabilities of the Microbial Control business unit met the criteria to be presented as “held for sale." As a result, as of September 30, 2021, such assets and liabilities were classified as held for sale and are reported on the Consolidated Balance Sheets. The Company expects that the transaction will close for approximately $1.274 billion in the second quarter of 2022 and that the sale proceeds less costs to sell will exceed the carrying value of the net assets.
Included in the Company's Consolidated Balance Sheets as of September 30, 2021 are the following carrying amounts of the assets and liabilities held for sale:
| (DOLLARS IN MILLIONS) | September 30, 2021 | ||||
| Assets | |||||
| Trade Receivables, net | $ | 60 | |||
| Inventories | 130 | ||||
| Property, plant and equipment, net | 30 | ||||
| Goodwill | 473 | ||||
| Other intangible assets, net | 349 | ||||
| Other assets | 83 | ||||
| Total assets held-for-sale | $ | 1,125 | |||
| Liabilities | |||||
| Accounts payable | $ | 61 | |||
| Other liabilities | 17 | ||||
| Total liabilities held-for-sale | $ | 78 |
The carrying amounts of the assets and liabilities held for sale are based on preliminary purchase price allocation and subject to changes within the measurement period. The Company is currently analyzing the tax impact of the sale transaction and, as such, has not included deferred tax liabilities, which are expected to be assumed by the buyer.
Fruit Preparation
During the second quarter of 2021, the Company entered into an agreement to divest its fruit preparation business, which is a part of the Nourish segment. As a result, for the period ended September 30, 2021, such assets and liabilities were classified as held for sale and are reported as current assets and liabilities on the Consolidated Balance Sheets in the amounts of approximately $120 million and $9 million, respectively. The transaction closed subsequent to the end of the third quarter on October 1, 2021. Although the transaction closed during the fourth quarter of 2021, the Company received cash proceeds of approximately $115 million during the third quarter of 2021, which is being held as restricted cash as of September 30, 2021. The Company is currently analyzing the tax impact of the sale transaction.
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