424B5
Table of Contents

Filed Pursuant to Rule 424(b)(5)

Registration No. 333-209889

 

 

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

6.00% Tangible Equity Units

  16,500,000   $50.00   825,000,000   $102,712.50

 

 

 

(1)

Assumes full exercise of the underwriters’ option to purchase up to an additional 1,500,000 Tangible Equity Units, solely to cover over-allotments, if any.

 

(2)

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


Table of Contents

 

PROSPECTUS SUPPLEMENT

(To Prospectus dated August 6, 2018)

15,000,000 Units

LOGO

INTERNATIONAL FLAVORS & FRAGRANCES INC.

6.00% TANGIBLE EQUITY UNITS

 

 

We are offering 15,000,000 6.00% tangible equity units, or “Units.” Each Unit has a stated amount of $50. Each Unit is comprised of (i) a prepaid stock purchase contract issued by us and (ii) a senior amortizing note due September 15, 2021 issued by us. Each amortizing note will have an initial principal amount of $8.45436 and a final installment payment date of September 15, 2021.

Unless earlier redeemed by us or settled earlier at your option or at our option as described herein, on September 15, 2021 (subject to postponement in certain limited circumstances), each purchase contract will automatically settle, and we will deliver a number of shares of our common stock, par value $0.125 per share, per purchase contract based on the applicable market value (as defined herein) of our common stock as set forth below:

 

   

if the applicable market value is greater than the threshold appreciation price, which is approximately $159.54, you will receive 0.3134 shares per purchase contract;

 

   

if the applicable market value is greater than or equal to the reference price, which is approximately $130.25, but less than or equal to the threshold appreciation price, you will receive a number of shares per purchase contract having a value, based on the applicable market value, equal to $50; and

 

   

if the applicable market value is less than the reference price, you will receive 0.3839 shares per purchase contract.

At any time prior to the second scheduled trading day immediately preceding September 15, 2021, you may settle your purchase contracts early, and we will deliver 0.3134 shares of our common stock per purchase contract (subject to adjustment). In addition, if a “fundamental change” (as defined herein) occurs and you elect to settle your purchase contracts early in connection with such fundamental change, you will receive a number of shares of our common stock per purchase contract equal to the fundamental change early settlement rate, as described herein. We may elect to settle all, but not less than all, outstanding purchase contracts prior to September 15, 2021 at the “early mandatory settlement rate” (as defined herein). If the closing of the Merger (as defined herein) has not occurred on or prior to February 7, 2019, or if, prior to such date, the Merger Agreement (as defined herein) is terminated, we may elect to settle all, but not less than all, outstanding purchase contracts at the “merger redemption rate” (as defined herein), by delivering notice to all holders during the five business day period immediately following February 7, 2019.

The amortizing notes will pay you equal quarterly cash installments of $0.75000 per amortizing note, which cash payment in the aggregate will be equivalent to 6.00% per year with respect to each $50 stated amount of Units. The amortizing notes are our direct, unsecured and unsubordinated obligations and will rank equally with all of our other unsecured and unsubordinated indebtedness from time to time outstanding. If we elect to redeem the purchase contracts or to settle the purchase contracts early, you will have the right to require us to repurchase your amortizing notes.

We have applied to list the Units on the New York Stock Exchange (“NYSE”) under the symbol “IFFT,” subject to satisfaction of its minimum listing standards with respect to the Units. If the Units are approved for listing, we expect trading on the NYSE to begin within 30 calendar days after the Units are first issued.

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

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

Concurrently with this offering of Units, we are offering 11,516,315 shares of our common stock for a total price to the public of approximately $1,500 million (or up to 12,667,947 shares, for a total price to the public of approximately $1,650 million, if the underwriters for that offering exercise their option to purchase additional shares of common stock). The completion of this Units offering is not contingent on the completion of the common stock offering, and the completion of the common stock offering is not contingent on the completion of this Units offering. Neither this offering nor the common stock offering is contingent on the completion of the Merger or any debt financing. If the Merger is not consummated, we intend to use the net proceeds from this offering, after payment of any cash redemption amount and/or repurchase price, for general corporate purposes, as described under “Use of Proceeds.”

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

 

 

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

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

 

 

PRICE $50.00 PER UNIT

 

 

 

     Per
Unit
     Total  

Public offering price

   $ 50.00      $ 750,000,000.00  

Underwriting discounts

   $ 1.425      $ 21,375,000.00  

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

   $ 48.575      $ 728,625,000.00  

We have granted the underwriters an option to purchase, exercisable within a 30-day period, up to an additional 1,500,000 Units. The underwriters expect to deliver the Units to purchasers on or about September 17, 2018.

 

 

Joint Book-Running Managers

 

Morgan Stanley   Citigroup   J.P. Morgan

Senior Lead Manager

BNP PARIBAS

Co-Managers

 

Citizens Capital Markets   ING   MUFG   US Bancorp
            Wells Fargo Securities                           Standard Chartered Bank                           HSBC

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


Table of Contents

TABLE OF CONTENTS

 

              Prospectus Supplement    Page  

ABOUT THIS PROSPECTUS SUPPLEMENT

     S-ii  

SUMMARY

     S-1  

THE OFFERING

     S-6  

SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA OF IFF

     S-17  

SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF FRUTAROM

     S-19  

RISK FACTORS

     S-20  

FORWARD-LOOKING STATEMENTS

     S-37  

USE OF PROCEEDS

     S-40  

CAPITALIZATION

     S-41  

PRICE RANGE OF COMMON STOCK AND DIVIDENDS

     S-43  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     S-44  

DESCRIPTION OF THE UNITS

     S-67  

DESCRIPTION OF THE PURCHASE CONTRACTS

     S-72  

DESCRIPTION OF THE AMORTIZING NOTES

     S-94  

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

     S-99  

UNDERWRITING

     S-106  

BOOK-ENTRY PROCEDURES AND SETTLEMENT

     S-111  

LEGAL MATTERS

     S-113  

EXPERTS

     S-113  

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

     S-114  

FRUTAROM INDUSTRIES LTD. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

Prospectus    Page  

About This Prospectus

     1  

The Company

     2  

Risk Factors

     3  

Special Note Regarding Forward-Looking Statements

     4  

Use of Proceeds

     6  

Ratio of Earnings to Fixed Charges

     7  

Description of Common Stock

     8  

Description of Debt Securities

     10  

Description of Purchase Contracts

     19  

Description of Units

     20  

Plan of Distribution

     21  

Legal Matters

     23  

Experts

     23  

Where You Can Find More Information; Incorporation By Reference

     23  

 

 

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

 

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ABOUT THIS PROSPECTUS SUPPLEMENT

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

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

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

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

 

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SUMMARY

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

The Company

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

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

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

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

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

 

Region

   % of 2017 Sales  

Europe, Africa, Middle East

     31

Greater Asia

     27

North America

     27

Latin America

     15

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



 

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

Our Strategic Priorities

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

 

(1)

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

 

(2)

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

 

(3)

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

 

(4)

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

General

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



 

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Recent Developments

Acquisition of Frutarom

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

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

 

   

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

 

   

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

 

   

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

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

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



 

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

Merger Financing

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

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

Concurrent Common Stock Offering

Concurrently with this offering of Units, we are offering $1,500 million of our common stock (or up to $1,650 million of our common stock if the underwriters for that offering exercise their option to purchase additional shares of common stock) pursuant to a separate prospectus supplement. This prospectus supplement is not an offer with respect to the concurrent common stock offering.

Debt Financings

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

 

   

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

 

   

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

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



 

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The completion of this Units offering is not contingent on the completion of the common stock offering, the Debt Financings or the Merger. However, if the closing of the Merger has not occurred on or prior to February 7, 2019, or if, prior to such date, the Merger Agreement is terminated, we may elect to redeem all, but not less than all, of the outstanding purchase contracts on the terms described under “Description of the Purchase Contracts—Merger Termination Redemption”. If we elect to exercise our merger termination redemption option, then holders of the amortizing notes will have the right to require us to repurchase some or all of their amortizing notes on the terms described under “Description of the Amortizing Notes—Repurchase of Amortizing Notes at the Option of the Holder”.

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

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

About Frutarom

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

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

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



 

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THE OFFERING

The summary below describes the principal terms of the Units, the purchase contracts and the amortizing notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The “Description of the Units,” “Description of the Purchase Contracts” and “Description of the Amortizing Notes” sections of this prospectus supplement, together with the “Description of Debt Securities” section of the accompanying prospectus, contain a more detailed description of the terms and conditions of the Units, the purchase contracts and the amortizing notes. As used in this section, the terms “we,” “us” and “our” mean International Flavors & Fragrances Inc. and do not include any subsidiary of International Flavors & Fragrances Inc.

The Units

 

Issuer

International Flavors & Fragrances Inc., a New York corporation

 

Number of Units Offered

15,000,000 Units

 

Underwriters’ Option

We have granted the underwriters an option, exercisable within a 30-day period, to purchase up to an additional 1,500,000 Units at the public offering price less the underwriting discount. This option may be exercised by the underwriters solely to cover over-allotments, if any.

 

Stated Amount of Each Unit

$50 for each Unit

 

Components of Each Unit

Each Unit is comprised of two parts:

 

   

a prepaid stock purchase contract issued by us (a “purchase contract”); and

 

 

   

a senior amortizing note issued by us (an “amortizing note”).

 

 

 

Unless earlier redeemed by us in connection with a merger termination redemption or settled earlier at the holder’s option or at our option, each purchase contract will, subject to postponement in certain limited circumstances, automatically settle on September 15, 2021 (such date, as so postponed (if applicable), the “mandatory settlement date”). Upon any settlement on the mandatory settlement date, we will deliver not more than 0.3839 shares and not less than 0.3134 shares of our common stock per purchase contract, subject to adjustment, based upon the

 


 

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applicable settlement rate and applicable market value of our common stock, as described below under “Description of the Purchase Contracts—Delivery of Common Stock.”

 

 

  Each amortizing note will have an initial principal amount of $8.45436, will bear interest at the rate of 3.79% per annum and will have a final installment payment date of September 15, 2021. On each March 15, June 15, September 15 and December 15, commencing on December 15, 2018, we will pay equal quarterly cash installments of $0.75000 per amortizing note (except for the December 15, 2018 installment payment, which will be $0.73333 per amortizing note), which cash payment in the aggregate per year will be equivalent to 6.00% per year with respect to each $50 stated amount of Units.  

 

  The return to an investor on a Unit will depend upon the return provided by each component. The overall return will consist of the value of the shares of our common stock delivered upon settlement of the purchase contracts and the cash installments paid on the amortizing notes.  

 

Each Unit May Be Separated Into Its Components

Each Unit may be separated by a holder into its constituent purchase contract and amortizing note on any business day during the period beginning on, and including, the business day immediately following the date of initial issuance of the Units to, but excluding, the second scheduled trading day immediately preceding September 15, 2021 or, if earlier, the second scheduled trading day immediately preceding any “early mandatory settlement date” or “merger redemption settlement date.” Prior to separation, the purchase contracts and amortizing notes may only be purchased and transferred together as Units. See “Description of the Units—Separating and Recreating Units.”

 

A Unit May Be Recreated From Its Components

If you hold a separate purchase contract and a separate amortizing note, you may



 

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combine the two components to recreate a Unit. See “Description of the Units—Separating and Recreating Units.”

 

 

Listing

We have applied to list the Units on the NYSE under the symbol “IFFT”, subject to satisfaction of its minimum listing standards with respect to the Units. However, we cannot assure you that the Units will be approved for listing. If approved for listing, we expect trading on the NYSE to begin within 30 calendar days after the Units are first issued. We will not initially apply to list the separate purchase contracts or the separate amortizing notes on any securities exchange or automated inter- dealer quotation system, but we may apply to list such separate purchase contracts and separate amortizing notes in the future as described under “Description of the Units—Listing of Securities.” Prior to this offering, there has been no public market for the Units.

 

  Our common stock is listed on the NYSE and Euronext Paris under the symbol “IFF.”  

 

Use of Proceeds

We estimate that the net proceeds to us from this Units offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $726 million (or up to approximately $799 million if the underwriters exercise their option to purchase additional Units). We intend to use the net proceeds from this offering, together with the net proceeds from the concurrent common stock offering, the Debt Financings and cash on hand to finance the Merger and to pay related fees and expenses. If for any reason the Merger is not consummated, we intend to use the net proceeds from this offering, after payment of any cash redemption amount and/or repurchase price, for general corporate purposes. See “Use of Proceeds”.

 

Concurrent Common Stock Offering

Concurrently with this offering of Units, we are offering $1,500 million of our



 

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common stock (or up to $1,650 million aggregate offering value if the underwriters for that offering exercise their option to purchase additional shares of common stock) pursuant to a separate prospectus supplement. This prospectus supplement is not an offer with respect to the concurrent common stock offering. There can be no assurance that the common stock offering will be completed. The completion of this Units offering is not contingent on the completion of the common stock offering, and the completion of the common stock offering is not contingent on the completion of this Units offering. Neither this offering nor the common stock offering is contingent on the consummation of the Merger or any debt financing.

 

 

Risk Factors

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

 

United States Federal Income Tax Consequences

There is no authority directly on point regarding the characterization of the Units for U.S. federal income tax purposes and therefore the characterization of the Units for these purposes is not entirely free from doubt. We will take the position for U.S. federal income tax purposes that each Unit will be treated as an investment unit comprised of two separate instruments consisting of (i) a purchase contract to acquire our common stock and (ii) an amortizing note that is our indebtedness. Under this treatment, a holder of Units will be treated as if it held each component of the Units for U.S. federal income tax purposes. By acquiring a



 

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Unit, you will agree to treat (i) a Unit as an investment unit composed of two separate instruments in accordance with its form and (ii) the amortizing notes as indebtedness for U.S. federal income tax purposes. If, however, the components of a Unit were treated as a single instrument, the U.S. federal income tax consequences could differ from the consequences described herein.

 

 

  Prospective investors should consult their tax advisors regarding the tax treatment of an investment in Units and whether a purchase of a Unit is advisable in light of the investor’s particular tax situation and the tax treatment described under “United States Federal Income Tax Consequences.”  

 

Governing Law

The Units, the purchase contract agreement, the purchase contracts, the indenture and the amortizing notes will all be governed by, and construed in accordance with, the laws of the State of New York.

The Purchase Contracts

 

Mandatory Settlement Date

September 15, 2021, subject to postponement in limited circumstances.

 

Mandatory Settlement

On the mandatory settlement date, unless such purchase contract has been earlier redeemed by us in connection with a merger termination redemption or earlier settled at the holder’s option or at our option, each purchase contract will automatically settle, and we will deliver a number of shares of our common stock, based on the applicable settlement rate.

 

Settlement Rate for the Mandatory Settlement Date

The “settlement rate” for each purchase contract will be not more than 0.3839 shares and not less than 0.3134 shares of our common stock (each subject to adjustment as described herein) depending on the applicable market value of our common stock, calculated as follows:

 

   

if the applicable market value is greater than the threshold

 


 

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appreciation price (as defined below), you will receive 0.3134 shares of common stock per purchase contract (the “minimum settlement rate”);

 

 

   

if the applicable market value is greater than or equal to the reference price but less or equal to than the threshold appreciation price, you will receive a number of shares per purchase contract equal to $50, divided by the applicable market value; and

 

 

   

if the applicable market value is less than the reference price, you will receive 0.3839 shares of common stock per purchase contract (the “maximum settlement rate”).

 

 

  Each of the maximum settlement rate and the minimum settlement rate is subject to adjustment as described below under “Description of the Purchase Contracts—Adjustments to the Fixed Settlement Rates.”  

 

  The “applicable market value” means the arithmetic average of the “daily VWAPs” (as defined below under “Description of the Purchase Contracts—Delivery of Common Stock”) of our common stock on each of the 20 consecutive trading days beginning on, and including, the 21st scheduled trading day immediately preceding September 15, 2021.  

 

  The “reference price” is equal to $50 divided by the maximum settlement rate and is approximately equal to $130.25, which is the public offering price of our common stock in the concurrent common stock offering described above.  

 

  The “threshold appreciation price” is equal to $50 divided by the minimum settlement rate. The threshold appreciation price, which is initially approximately $159.54, represents an approximately 22.5% appreciation over the reference price.  

 



 

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  No fractional shares of our common stock will be issued to holders upon settlement or redemption of purchase contracts. In lieu of fractional shares, holders will be entitled to receive a cash payment of equivalent value calculated as described herein. Other than cash payments in lieu of fractional shares or, under certain circumstances, in the event of a merger termination redemption, holders of purchase contracts will not receive any cash distributions.  

The following table illustrates the settlement rate per purchase contract and the value of our common stock issuable upon settlement on the mandatory settlement date, determined using the applicable market value shown, subject to adjustment.

 

Applicable Market Value of Our
Common Stock

  

Settlement Rate

  

Value of Common Stock Delivered
(Based on the Applicable Market
Value Thereof)

Less than the reference price    0.3839 shares of our common stock    Less than $50
Greater than or equal to the reference price but less than or equal to the threshold appreciation price    A number of shares of our common stock equal to $50 divided by the applicable market value    $50
Greater than the threshold appreciation price    0.3134 shares of our common stock    Greater than $50

 

Early Settlement at Your Election

At any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding September 15, 2021, you may settle any or all of your purchase contracts early, in which case we will deliver a number of shares of our common stock per purchase contract equal to the minimum settlement rate, which is subject to adjustment as described below under “Description of the Purchase Contracts—Adjustments to the Fixed Settlement Rates.” That is, the market value of our common stock on the early settlement date will not affect the early settlement rate. Your right to settle your purchase contracts prior to the second scheduled trading day immediately preceding September 15, 2021 is subject to the delivery of your purchase contracts.


 

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  Upon early settlement at the holder’s election of a purchase contract that is a component of a Unit, the corresponding amortizing note will remain outstanding and beneficially owned by or registered in the name of, as the case may be, the holder who elected to settle the related purchase contract early.  

 

Early Settlement at Your Election Upon a Fundamental Change

At any time prior to the second scheduled trading day immediately preceding September 15, 2021, if a “fundamental change” (as defined herein) occurs, you may settle any or all of your purchase contracts early. If you elect to settle your purchase contracts early in connection with such fundamental change, you will receive a number of shares of our common stock per purchase contract equal to the “fundamental change early settlement rate” as described under “Description of the Purchase Contracts—Early Settlement Upon a Fundamental Change.”

 

  Upon early settlement at the holder’s election in connection with a fundamental change of a purchase contract that is a component of a Unit, the corresponding amortizing note will remain outstanding and beneficially owned by or registered in the name of, as the case may be, the holder who elected to settle the related purchase contract early upon such fundamental change.  

 

Early Mandatory Settlement at Our Election

On or after June 18, 2019, we may elect to settle all, but not less than all, outstanding purchase contracts early at the “early mandatory settlement rate” (as described under “Description of the Purchase Contracts — Early Settlement at Our Election”) on a date fixed by us upon not less than five business days’ notice (the “early mandatory settlement date”).

 

 

The “early mandatory settlement rate” will be the maximum settlement rate as of the relevant notice date, unless the closing price of our common stock for 20 or more trading days in a period of 30

 


 

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consecutive trading days ending on the trading day immediately preceding the “notice date” (as defined under “—Early Settlement at Our Election” below) (including the last trading day of such period) exceeds 130% of the threshold appreciation price in effect on each such trading day, in which case the “early mandatory settlement rate” will be the minimum settlement rate as of such relevant notice date.

 

 

  If we elect to settle all the purchase contracts early, you will have the right to require us to repurchase your amortizing notes, except in certain circumstances, on the repurchase date and at the repurchase price as described under “Description of the Amortizing Notes—Repurchase of Amortizing Notes at the Option of the Holder.”  

 

Merger Termination Redemption

If the closing of the Merger has not occurred on or prior to February 7, 2019, or if, prior to such date, the Merger Agreement is terminated, we may elect to redeem all, but not less than all, of the outstanding purchase contracts (a “merger termination redemption”), for the applicable redemption amount, as described below under “Description of the Purchase Contracts—Merger Termination Redemption,” by delivering notice during the five business day period immediately following February 7, 2019.

 

 

If the “merger termination stock price” is equal to or less than the reference price, the redemption amount will be an amount of cash as described under “Description of the Purchase Contracts—Merger Termination Redemption.” Otherwise, the redemption amount will be a number of shares of our common stock equal to the merger redemption rate, calculated in the manner described under “Description of the Purchase Contracts—Merger Termination Redemption;” provided, however, that we may elect to pay cash in lieu of delivering any or all of such shares in an amount equal to such

 


 

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number of shares multiplied by the redemption market value thereof.

 

 

  The “redemption market value” means the arithmetic average of the daily VWAPs of our common stock for 20 consecutive trading days beginning on, and including, the 21st scheduled trading day immediately preceding the scheduled merger redemption settlement date.  

 

  In the event of a merger termination redemption, you will have the right to require us to repurchase your amortizing notes, as described under “Description of the Amortizing Notes—Repurchase of Amortizing Notes at the Option of the Holder.”  

The Amortizing Notes

 

Issuer

International Flavors & Fragrances Inc., a New York corporation

 

Initial Principal Amount of Each Amortizing Note

$8.45436

 

Installment Payments

Each installment payment of $0.75000 per amortizing note (except for the December 15, 2018 installment payment, which will be $0.73333 per amortizing note) will be paid in cash and will constitute a partial repayment of principal and a payment of interest, computed at an annual rate of 3.79%. Interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Payments will be applied first to the interest due and payable and then to the reduction of the unpaid principal amount, allocated as set forth on the amortization schedule set forth under “Description of the Amortizing Notes—Amortization Schedule.”

 

Installment Payment Dates

Each March 15, June 15, September 15 and December 15, commencing on December 15, 2018, with a final installment payment date of September 15, 2021.

 

Ranking

The amortizing notes are our direct, unsecured and unsubordinated obligations and will rank equally with all



 

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of our other unsecured and unsubordinated indebtedness from time to time outstanding. See “Description of the Amortizing Notes—Ranking” in this prospectus supplement.

 

 

  As of June 30, 2018, we had $1,723.7 million of debt outstanding. As of June 30, 2018, our subsidiaries (i) had approximately $759.4 million of outstanding liabilities and (ii) as adjusted for this offering, would have had $759.4 million of outstanding liabilities, in each case including trade payables, but excluding intercompany liabilities and deferred gains.  

 

Repurchase of Amortizing Notes at the Option of the Holder

If we elect to settle the purchase contracts early or in the event of a merger termination redemption, holders will have the right to require us to repurchase their amortizing notes for cash at the repurchase price as described under “Description of the Amortizing Notes—Repurchase of Amortizing Notes at the Option of the Holder.”

 

Sinking Fund

None.

 

Trustee

U.S. Bank National Association

Immediately after the consummation of the concurrent common stock offering, we will have 90,564,368 shares of common stock (or up to 91,716,000 shares if the underwriters for the common stock offering exercise their option to purchase additional shares) issued and outstanding, which is based on 79,048,053 shares of common stock outstanding as of September 4, 2018 and excludes:

 

   

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

 

   

5,758,500 shares of common stock reserved for issuance upon conversion of the Units (assuming no exercise of the underwriters’ option to purchase additional Units); and

 

   

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



 

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SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA OF IFF

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

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

 

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

31,
    Year Ended December 31,  
    2018     2018     2017     2017     2017     2016     2015  

Statement of Income Data:

             

Net sales

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

Cost of goods sold

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

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

Research and development expenses

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


 

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Selling and administrative expenses

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

Restructuring and other charges, net

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

Amortization of acquisition-related intangibles

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

Gain on sales of fixed assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

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

Interest expense

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

Other (income) expense, net

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

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

Taxes on income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (Including noncontrolling interest)

    264,380           290,752        

Less: noncontrolling interest

    3,204           4,895        
 

 

 

       

 

 

       

Net Income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

             

Basic

    2.34       2.89       2.85       2.56       3.73       5.07       5.19  

Diluted

    2.31       2.87       2.84       2.54       3.72       5.05       5.16  

Cash dividends declared per share

      1.38       1.28         2.66       2.40       2.06  

Balance Sheet Data at Period End:

             

Total Assets

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

Long-term debt

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

Total Shareholders’ Equity including noncontrolling interest

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


 

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SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF FRUTAROM

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

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

 

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

Statement of Income Data:

             

Sales

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

Cost of sales

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

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

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

Selling, marketing, research and development expenses – net

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

General and administrative expenses

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

Other expenses – net

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

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

     1,326       444        1,402        1,113         
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

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

Financial Expenses – net

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

Income before taxes on income

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

Income tax

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

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

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

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

             

Basic

     1.64       1.17        2.52        1.85        1.62  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted

     1.63       1.17        2.51        1.84        1.60  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividends declared per share

          0.12        0.11        0.09  

Balance Sheet Data at Period End:

             

Total Assets

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

Long term loans, net of current maturities

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

Total equity

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


 

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RISK FACTORS

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

Risks Related to Our Business

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

Risks Related to the Merger

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

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

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

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

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

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

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

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

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

 

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

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

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

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

Risks Related to the Units, the Separate Purchase Contracts and the Separate Amortizing Notes

If the closing of the Merger has not occurred on or prior to February 7, 2019, or if, prior to such date, the Merger Agreement is terminated, we may redeem the purchase contracts for an amount of cash and/or a number of shares of our common stock (depending on the price of our common stock at the time of redemption) with a value that may not adequately compensate you for any lost option value.

Our planned acquisition of Frutarom may not be consummated. See “—Risks Related to our Planned Acquisition of Frutarom.” If the closing of the Merger has not occurred on or prior to February 7, 2019, or if, prior to such date, the Merger Agreement is terminated, we may elect to redeem all, but not less than all, of the outstanding purchase contracts by delivering notice within the five business days immediately following February 7, 2019. We will pay or deliver, as the case may be, a redemption amount to be determined based on the price of our common stock at that time in cash or in shares of our common stock in accordance with the terms of the purchase contracts (as described under “Description of the Purchase Contracts—Merger Termination Redemption”). If we elect to redeem the purchase contracts, we may be required by the holders thereof to repurchase the amortizing notes at the repurchase price set forth under “Description of the Amortizing Notes—Repurchase of Amortizing Notes at the Option of the Holder.” The redemption amount that you receive upon a merger termination redemption may not adequately compensate you for any lost option value of the purchase contracts. In addition, if the Merger is not consummated, the net proceeds from this offering and of the concurrent common stock offering, if completed, will not be used to consummate the Merger. Instead, we intend to use the net proceeds from this offering and concurrent common stock offering, if completed, after payment of any cash redemption amount and/or repurchase price, as described above, for general corporate purposes.

 

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You will bear the risk that the market value of our common stock may decline.

The purchase contracts, pursuant to which we will deliver to you shares of our common stock, are components of the Units. The number of shares of common stock that you will receive upon settlement of a purchase contract on the mandatory settlement date, whether as a component of a Unit or a separate purchase contract, will depend upon the applicable market value, which is equal to the arithmetic average of the daily VWAPs of our common stock on each of the 20 consecutive trading days beginning on, and including, the 21st scheduled trading day immediately preceding September 15, 2021. There can be no assurance that the market value of the common stock received by you will be greater than or equal to the reference price of approximately $130.25. If the applicable market value of our common stock is less than the reference price, then the market value of the common stock issued to you on the mandatory settlement date (assuming that the market value is the same as the applicable market value of the common stock) will be less than the effective price per share paid by you for such common stock on the date of issuance of the Units. Furthermore, because we will in no event deliver more than 0.3839 shares (subject to adjustment as described herein) upon settlement of a purchase contact, the market value of the common stock delivered to you upon any early settlement may be less than the effective price per share paid to you for such common stock on the date of the issuance of the Units. Therefore, you assume the entire risk that the market value of our common stock may decline before the mandatory settlement date, early settlement date, fundamental change early settlement date, merger redemption settlement date or early mandatory settlement date, as applicable. Any decline in the market value of our common stock may be substantial.

See “—Risks Related to Our Common Stock” for a discussion of risks related to our common stock.

The opportunity for equity appreciation provided by an investment in the Units is less than that provided by a direct investment in our common stock.

The aggregate market value of our common stock delivered to you upon settlement of a purchase contract on the mandatory settlement date generally will exceed the $50 stated amount of each Unit only if the applicable market value of our common stock exceeds the threshold appreciation price. Therefore, during the period prior to the mandatory settlement date, an investment in a Unit affords less opportunity for equity appreciation than a direct investment in our common stock. If the applicable market value exceeds the reference price but is less than the threshold appreciation price, you will realize no equity appreciation on our common stock above the reference price. Furthermore, if the applicable market value exceeds the threshold appreciation price, you would receive only a portion of the appreciation in the market value of the shares of our common stock you would have received had you purchased shares of common stock with $50 at the public offering price in the concurrent common stock offering. See “Description of the Purchase Contracts—Delivery of Common Stock” for a table showing the number of shares of common stock that you would receive at various applicable market values.

We may not be able to settle or redeem your purchase contracts and deliver shares of our common stock, or make payments on the amortizing notes or repurchase the amortizing notes, in the event that we file for bankruptcy.

Pursuant to the terms of the purchase contract agreement, your purchase contracts will automatically accelerate upon the occurrence of specified events of bankruptcy, insolvency or reorganization with respect to us.

A bankruptcy court may prevent us from delivering our common stock to you in settlement or redemption of your purchase contracts. In such circumstances or if for any other reason the accelerated purchase contracts are not settled by the delivery of common stock, your resulting claim for damages against us following such acceleration will rank pari passu with the claims of holders of our common stock in the relevant bankruptcy proceeding. As such, to the extent we fail to deliver common stock to you upon such an acceleration, you will only be able to recover damages to the extent holders of our common stock receive any recovery. See “Description of the Purchase Contracts—Consequences of Bankruptcy.”

 

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In addition, with respect to the amortizing notes, bankruptcy law and bankruptcy-related court orders generally prohibit the payment of pre-bankruptcy debt by a company that has commenced a bankruptcy case while the case is pending. If we become a debtor in a bankruptcy case, so long as the case was pending, you would likely not receive timely installment payments under, or, if you exercised your right to require repurchase following a merger termination redemption or early mandatory settlement, receive any repurchase price on, the amortizing notes.

The amortizing notes will be subject to the prior claims of any secured creditors, and if a default occurs, we may not have sufficient funds to fulfill our obligations under the amortizing notes.

The amortizing notes are unsecured obligations, ranking equally with our other senior unsecured indebtedness and effectively junior to any secured indebtedness we may incur. If we incur secured debt, our assets securing any such indebtedness will be subject to prior claims by our secured creditors. In the event of the bankruptcy, insolvency, liquidation, reorganization, dissolution or other winding up of the Company, our assets that secure debt will be available to pay obligations on the amortizing notes only after all debt secured by those assets has been repaid in full. If there are not sufficient assets remaining to pay all creditors, then all or a portion of the amortizing notes then outstanding would remain unpaid. Additionally, if any portion of the amount payable on the amortizing notes upon acceleration is considered by a court to be unearned interest, the court could disallow recovery of any such portion.

The amortizing notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

The amortizing notes are our obligations exclusively and not of any of our subsidiaries. In the year ended December 31, 2017, International Flavors & Fragrances Inc. generated approximately 21% of our consolidated net sales and 14% of our consolidated gross profit (excluding intercompany sales) at the parent level, while our subsidiaries generated approximately 79% of our consolidated net sales and 86% of our consolidated gross profit. Our subsidiaries are separate legal entities that have no obligation to pay any amounts due under the amortizing notes or to make any funds available therefor, whether by dividends, loans or other payments. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors, including trade creditors of our subsidiaries, will have priority with respect to the assets of such subsidiaries over our claims (and therefore the claims of our creditors, including holders of the amortizing notes). Consequently, the amortizing notes will be structurally subordinated to all liabilities, including trade payables, of our subsidiaries and any subsidiaries that we may in the future acquire or establish. As of June 30, 2018, our subsidiaries (i) had approximately $759.4 million of outstanding liabilities and (ii) as adjusted for this offering, would have had $759.4 million of outstanding liabilities, in each case including trade payables, but excluding intercompany liabilities and deferred gains.

In addition, the indenture governing the amortizing notes permits our subsidiaries to incur additional indebtedness, and does not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by our subsidiaries.

The trading prices for the Units, the purchase contracts and the amortizing notes will be directly affected by the trading prices for our common stock, the general level of interest rates and our credit quality, each of which is impossible to predict.

It is impossible to predict whether the prices of our common stock, interest rates or our credit quality will rise or fall. Trading prices of the common stock will be influenced by general stock market conditions and our operating results and business prospects and other factors described elsewhere in this section “Risk Factors.”

The market for our common stock likely will influence, and be influenced by, any market that develops for the Units or the separate purchase contracts. For example, investors’ anticipation of the distribution into the market of the additional shares of common stock issuable upon settlement of the purchase contracts could

 

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depress the price of our common stock and increase the volatility of the common stock price, which could in turn depress the price of the Units or the separate purchase contracts. The price of our common stock also could be affected by possible sales of such common stock by investors who view the Units as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that is likely to develop involving the Units, separate purchase contracts and the common stock. Such hedging or arbitrage activity could, in turn, affect the trading prices of the Units, the separate purchase contracts and the common stock.

In addition, in general, as market interest rates rise, notes (such as the amortizing notes) bearing interest at a fixed rate generally decline in value because the premium, if any, over market interest rates will decline. Consequently, if you purchase Units and market interest rates increase, the market value of the amortizing notes forming a portion of the Units may decline. We cannot predict the future level of market interest rates.

Regulatory actions and other events may adversely affect the trading price and liquidity of the Units.

We expect that many investors in, and potential purchasers of, the Units will employ, or seek to employ, an equity-linked arbitrage strategy with respect to the Units. Investors would typically implement such a strategy by selling short the common stock underlying the Units and dynamically adjusting their short position while continuing to hold the Units. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of or in addition to short selling the common stock. The SEC and other regulatory and self-regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). Such rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the national securities exchanges of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any governmental or regulatory action that restricts the ability of investors in, or potential purchasers of, the Units to effect short sales of our common stock, borrow our common stock or enter into swaps on our common stock could adversely affect the trading price and the liquidity of the Units.

In addition, if investors and potential purchasers seeking to employ an equity-linked arbitrage strategy are unable to borrow or enter into swaps on our common stock, in each case, on commercially reasonable terms, the trading price and liquidity of the Units may be adversely affected.

You may receive shares of common stock upon settlement of the purchase contracts that are lower in value than the price of the common stock just prior to the mandatory settlement date or merger redemption settlement date, as the case may be.

Because the applicable market value of the common stock is determined over (i) the 20 consecutive trading days beginning on, and including, the 21st scheduled trading day immediately preceding September 15, 2021, in the case of settlement on the mandatory settlement date, or (ii) the five consecutive trading day period ending on, and including, the trading day immediately preceding February 7, 2019, in the case of merger termination redemption, the number of shares of common stock delivered for each purchase contract may, on the mandatory settlement date or the merger redemption settlement date, as the case may be, be greater than or less than the number of shares that would have been delivered based on the closing price (or daily VWAP) of the common stock on the last trading day in the related five or 20 trading day period. In addition, you will bear the risk of fluctuations in the market price of the shares of common stock deliverable upon settlement of the purchase contracts between the end of such period and the date such shares are delivered.

If you elect to settle your purchase contracts early, you may not receive the same return on your investment as purchasers whose purchase contracts are settled on the mandatory settlement date.

Holders of the Units or separate purchase contracts have the option to settle their purchase contracts early at any time beginning on, and including, the business day immediately following the date of initial issuance of the

 

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Units until the second scheduled trading day immediately preceding September 15, 2021. However, if you settle your purchase contracts prior to the second scheduled trading day immediately preceding September 15, 2021, you will receive for each purchase contract a number of shares of common stock equal to the minimum settlement rate, regardless of the current market value of our common stock, unless you elect to settle your purchase contracts early in connection with a fundamental change, in which case you will be entitled to settle your purchase contracts at the fundamental change early settlement rate, which may be greater than the minimum settlement rate. In either case, you may not receive the same return on your investment as purchasers whose purchase contracts are settled on the mandatory settlement date.

The fundamental change early settlement rate or the amount of cash and/or number of shares of our common stock paid or delivered, as the case may be, upon a merger termination redemption, may not adequately compensate you.

If a “fundamental change” occurs and you elect to exercise your fundamental change early settlement right, you will be entitled to settle your purchase contracts at the fundamental change early settlement rate. In addition, in connection with any merger termination redemption, upon redemption of the purchase contracts, you will be paid an amount of cash equal to the redemption amount (or, in certain circumstances, a number of shares of our common stock or any combination of cash and shares of our common stock). Although the fundamental change early settlement rate or the redemption amount, as the case may be, is designed to compensate you for the lost option value of your purchase contracts as a result of the early settlement of the purchase contracts, this feature may not adequately compensate you for such loss. In addition, if the stock price in the fundamental change is greater than $300.00 per share (subject to adjustment), this feature of the purchase contracts will not compensate you for any additional loss suffered in connection with a fundamental change. See “Description of the Purchase Contracts—Early Settlement Upon a Fundamental Change” and “Description of the Purchase Contracts—Merger Termination Redemption.”

Our obligation to settle the purchase contracts at the fundamental change early settlement rate or to redeem the purchase contracts pursuant to a merger termination redemption could be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness of economic remedies.

The minimum settlement rate, maximum settlement rate, reference price and threshold appreciation price of the purchase contracts may not be adjusted for all dilutive events and any adjustment may not be adequate compensation for lost value.

The minimum settlement rate, maximum settlement rate, reference price and threshold appreciation price of the purchase contracts are subject to adjustment for certain events, including, but not limited to, certain dividends on our common stock, the issuance of certain rights, options or warrants to holders of our common stock, subdivisions or combinations of our common stock, certain distributions of assets, debt securities, capital stock or cash to holders of our common stock and certain tender offers or exchange offers, as described under “Description of the Purchase Contracts—Adjustments to the Fixed Settlement Rates” in this prospectus supplement. The minimum settlement rate, maximum settlement rate, reference price and threshold appreciation price will not be adjusted for other events that may adversely affect the trading price of the purchase contracts or the Units and the market price of our common stock, such as employee stock options grants, offerings of our common stock for cash (including under the concurrent common stock offering), certain exchanges of our common stock for our other securities or in connection with acquisitions (including the Merger) and other transactions. The terms of the Units and the separate purchase contracts do not restrict our ability to engage in these activities, and events may occur that are adverse to the interests of the holders of the purchase contracts or the Units and their value, but that do not result in an adjustment to the minimum settlement rate, maximum settlement rate, reference price and threshold appreciation price, or that result in an adjustment that is not adequate compensation for lost value.

 

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We may incur additional indebtedness.

As of June 30, 2018, we had $1,723.7 million of debt outstanding. The indenture governing the amortizing notes does not prohibit us from incurring additional unsecured indebtedness or secured indebtedness that would be effectively senior to the amortizing notes in the future. The indenture governing the amortizing notes also permits unlimited additional borrowings by our subsidiaries that are effectively senior to the amortizing notes. In addition, the indenture does not contain any restrictive covenants limiting our ability to pay dividends or make payments on junior or other indebtedness.

The Units are not protected by restrictive covenants.

Neither the purchase contracts nor the indenture contains any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Neither the purchase contracts nor the indenture contains any covenants or other provisions to afford protection to holders of the purchase contracts or the amortizing notes in the event of a fundamental change involving International Flavors & Fragrances Inc. except, with respect to the purchase contracts, to the extent described under “Description of the Units—Early Settlement Upon a Fundamental Change.”

Until the purchase contracts are settled with, or redeemed for, common stock, you will not be entitled to any rights with respect to our common stock, but you will be subject to all changes made with respect to our common stock.

Until the date on which you are treated as the record holder of common stock on account of a redemption or settlement of the purchase contracts for or with, as the case may be, common stock, you will not be entitled to any rights with respect to our common stock, including voting rights and rights to receive any dividends or other distributions on our common stock, but you will be subject to all changes affecting the common stock. You will be treated as the record holder of any shares of our common stock issuable upon settlement or redemption of the purchase contracts only as follows:

 

   

in the case of (x) settlement of purchase contracts on the mandatory settlement date or (y) a merger termination redemption if the merger termination stock price is greater than the reference price and we elect to pay cash in lieu of delivering a portion of any shares of common stock that would otherwise be included in the redemption amount, as of 5:00 p.m., New York City time, on the last trading day of the 20 consecutive trading day period during which the applicable market value or redemption market value, as the case may be, is determined;

 

   

in the case of settlement of purchase contracts in connection with any early settlement at the holder’s option, as of 5:00 p.m., New York City time, on the early settlement date;

 

   

in the case of settlement of purchase contracts following exercise of a holder’s fundamental change early settlement right, as of 5:00 p.m., New York City time, on the fundamental change early settlement date;

 

   

in the case of settlement of purchase contracts following exercise by us of our early mandatory settlement right, as of 5:00 p.m., New York City time, on the notice date; and

 

   

in the case of a merger termination redemption where we elect (or are deemed to have elected) to settle the redemption amount solely by delivering shares of common stock, as of 5:00 p.m., New York City time, on the date of the merger redemption notice.

For example, in the event that an amendment is proposed to our restated certificate of incorporation or by-laws requiring stockholder approval and the record date for determining the stockholders of record entitled to

 

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vote on the amendment occurs prior to the date specified above on which you are treated as the record holder of the shares of our common stock, you will not be entitled to vote on the amendment, although you will nevertheless be subject to any changes in the powers, preferences or special rights of our common stock once you become a stockholder.

Some significant restructuring transactions may not constitute fundamental changes, in which case we would not be obligated to early settle the purchase contracts, and you will not have the right to require repurchase of your amortizing notes upon a fundamental change.

Upon the occurrence of specified fundamental changes, you will have the right to require us to settle the purchase contracts. You will not have the right to require repurchase of your amortizing notes upon a fundamental change, however. Additionally, the definition of “fundamental change” herein is limited to specified corporate events and may not include other events that might adversely affect our financial condition or the value of the purchase contracts. For example, events such as leveraged recapitalizations, refinancings, restructurings or acquisitions initiated by us may not constitute a fundamental change requiring us to settle the purchase contracts at the applicable fundamental change early settlement rate. In the event of any such events, the holders of the purchase contracts would not have the right to require us to settle the purchase contracts at the applicable fundamental change early settlement rate, even though each of these transactions could increase the amount of our indebtedness, or otherwise adversely affect our capital structure or any credit ratings, thereby adversely affecting the trading price of the purchase contracts and/or the amortizing notes.

We may not have the ability to raise the funds necessary to repurchase the amortizing notes following the exercise of our early mandatory settlement right or in connection with a merger termination redemption, and our debt outstanding at that time may contain limitations on our ability to repurchase the amortizing notes.

If we elect to exercise our early mandatory settlement right or effect a merger termination redemption, holders of the amortizing notes will have the right to require us to repurchase the amortizing notes on the repurchase date at the repurchase price described under “Description of the Amortizing Notes—Repurchase of Amortizing Notes at the Option of the Holder.” However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of amortizing notes surrendered for repurchase. In addition, our ability to pay the relevant repurchase price for the amortizing notes may be limited by agreements governing our current and future indebtedness. Our failure to repurchase amortizing notes at a time when the repurchase is required by the indenture would constitute a default under the indenture. A default under the indenture could also lead to a default under agreements governing our indebtedness outstanding at that time. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and the repurchase price for the amortizing notes.

The secondary market for the Units, the purchase contracts and the amortizing notes may be illiquid.

We have applied to list the Units on the NYSE under the symbol “IFFT”, subject to satisfaction of its minimum listing standards with respect to the Units. However, we cannot assure you that the Units will be approved for listing. If the Units are approved for listing, we expect that the Units will begin trading on the NYSE within 30 calendar days after the Units are first issued. In addition, the underwriters have advised us that they intend to make a market in the Units, but the underwriters are not obligated to do so. However, listing on the NYSE does not guarantee that a trading market will develop, and the underwriters may discontinue market making at any time in their sole discretion without prior notice to Unit holders. Accordingly we cannot assure you that a liquid trading market will develop for the Units (or, if developed, that a liquid trading market will be maintained), that you will be able to sell Units at a particular time or that the prices you receive when you sell will be favorable.

Beginning on the business day immediately succeeding the date of initial issuance of the Units, purchasers of Units will be able to separate each Unit into a purchase contract and an amortizing note. We are unable to predict

 

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how the separate purchase contracts or the separate amortizing notes will trade in the secondary market, or whether that market will be liquid or illiquid. We will not initially apply to list the separate purchase contracts or the separate amortizing notes on any securities exchange or automated inter-dealer quotation system, but we may apply to list such separate purchase contracts and separate amortizing notes in the future as described herein. If (i) a sufficient number of Units are separated into separate purchase contracts and separate amortizing notes and traded separately such that applicable listing requirements are met and (ii) a sufficient number of holders of such separate purchase contracts and separate amortizing notes request that we list such separate purchase contracts and separate amortizing notes, we may endeavor to list such separate purchase contracts and separate amortizing notes on an exchange of our choosing (which may or may not be the NYSE) subject to applicable listing requirements. However, even if we do so apply to list such separate purchase contracts or separate amortizing notes, we cannot assure you that such securities will be approved for listing.

The purchase contract agreement will not be qualified under the Trust Indenture Act, and the obligations of the purchase contract agent are limited.

The purchase contract agreement between us and the purchase contract agent will not be qualified as an indenture under the Trust Indenture Act of 1939, and the purchase contract agent will not be required to qualify as a trustee under the Trust Indenture Act. Thus, you will not have the benefit of the protection of the Trust Indenture Act with respect to the purchase contract agreement or the purchase contract agent. The amortizing notes constituting a part of the Units will be issued pursuant to an indenture, which has been qualified under the Trust Indenture Act. Accordingly, if you hold Units, you will have the benefit of the protections of the Trust Indenture Act only to the extent applicable to the amortizing notes. The protections generally afforded the holder of a security issued under an indenture that has been qualified under the Trust Indenture Act include:

 

   

disqualification of the indenture trustee for “conflicting interests,” as defined under the Trust Indenture Act;

 

   

provisions preventing a trustee that is also a creditor of the issuer from improving its own credit position at the expense of the security holders immediately prior to or after a default under such indenture; and

 

   

the requirement that the indenture trustee deliver reports at least annually with respect to certain matters concerning the indenture trustee and the securities.

The U.S. federal income tax consequences relating to the Units are uncertain.

No statutory, judicial or administrative authority directly addresses the characterization of the Units or instruments similar to the Units for U.S. federal income tax purposes. As a result, some aspects of the U.S. federal income tax consequences of an investment in the Units are not certain. Specifically, the amortizing notes and the purchase contracts could potentially be recharacterized as a single instrument for U.S. federal income tax purposes, in which case (i) “U.S. holders” (as defined below under “United States Federal Income Tax Consequences—U.S. Holders”) could be required to recognize the entire amount of each installment payment on the amortizing notes, rather than merely the portion of such payment denominated as interest, as income and (ii) payments of principal and interest made to “non-U.S. holders” (as defined below under “United States Federal Income Tax Consequences—Non-U.S. Holders”) on the amortizing notes could be subject to U.S. withholding tax. We have not sought any rulings from the Internal Revenue Service (“IRS”) concerning the treatment of the Units, and no assurance can be given that the IRS or any court will agree with the tax consequences described in “United States Federal Income Tax Consequences.” Prospective investors should consult their tax advisors regarding potential alternative tax characterizations of the Units.

You may be subject to tax upon an adjustment to the settlement rate of the purchase contracts even though you do not receive a corresponding cash distribution.

The fixed settlement rates of the purchase contracts are subject to adjustment in certain circumstances, including the payment of certain cash dividends or upon a fundamental change. If the settlement rates are

 

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adjusted as a result of a distribution that is taxable to our common stockholders, such as a cash dividend, you generally will be deemed to have received for U.S. federal income tax purposes a taxable dividend without the receipt of any cash. In addition, a failure to adjust (or to adjust adequately) the settlement rates after an event that increases your proportionate interest in us could be treated as a deemed taxable dividend to you. You may also be deemed to have received a taxable dividend in the event we make certain other adjustments to the settlement rates of the purchase contracts. For example, if a fundamental change occurs prior to the maturity date, under some circumstances, we will increase the settlement rate for purchase contracts settled in connection with the fundamental change. Such increase may also be treated as a distribution subject to U.S. federal income tax as a dividend. See “United States Federal Income Tax Consequences.” If you are a “non-U.S. holder” (as defined in “United States Federal Income Tax Consequences—Non-U.S. Holders”), a deemed dividend may be subject to U.S. federal withholding tax (currently at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty), which may be withheld from shares of common stock or sales proceeds subsequently paid or credited to you. It is possible that U.S. withholding tax on deemed dividends would be withheld from any interest or other amounts paid to a non-U.S. holder. See “United States Federal Income Tax Consequences—Non-U.S. Holders— Dividends and Other Distributions with Respect to Our Common Stock and Purchase Contracts.”

Any adverse rating action with respect to the Units may cause their trading price to fall.

We do not intend to seek a rating on the Units. However, if a rating service were to rate the Units and if such rating service were to lower its rating on the Units below the rating initially assigned to the Units or otherwise announces its intention to put the Units on credit watch, the trading price of the Units could decline.

Risks Related to our Common Stock

The market price of our common stock may be volatile and could fall.

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

our dividend policy;

 

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

 

   

future sales of equity or equity-related securities;

 

   

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

 

   

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

 

   

actions by institutional shareholders; and

 

   

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

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

Future sales of substantial amounts of our common stock could affect the market price of our common stock.

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

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

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

Risks Related to Frutarom

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

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

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

 

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

Frutarom operates in a number of countries besides the United States and Western Europe, such as Russia, Ukraine, Turkey, Slovenia, Kazakhstan, China, countries in South and Central America (including Brazil, Guatemala, Peru, Chile and Mexico) and countries in northern, southern and western Africa, and is therefore exposed to political, economic and legal developments in these countries which are generally less predictable than in developed countries. Frutarom’s facilities in these countries could be subject to disruption as a result of economic and/or political instability as well as from nationalization and/or expropriation of assets situated there. There is also substantial risk relating to restrictions on Frutarom in collecting payment from its customers, distributors, or agents, as well as foreign exchange restrictions which could impede Frutarom’s ability to realize its profits or to sell its assets in these countries. While none of the emerging market countries in which Frutarom operates impose foreign exchange restrictions that affect Frutarom, such restrictions existed not long ago and there is no assurance that they will not be reinstated in the future.

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

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

Frutarom operates in a highly competitive industry.

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

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

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

 

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

Frutarom is subject to a variety of international and domestic health, safety and environmental statutes in the various countries in which it operates. In general, there is a trend towards increased regulation in the fields of Frutarom’s activities. This trend stems from, among other things, growing consumer sensitivity concerning the inclusion of flavor additives in food products and the fact that regulators perceive nutraceuticals, medical food and functional food products as having medicinal attributes. In some countries such products may be subjected to the same standards and regulations as applied to drugs or targeted regulation for these categories. In addition, regulators in different countries can change regulations applying to infant nutrition or clinical nutrition for the elderly in a way that might affect Frutarom’s sales in these categories. Frutarom has identified the markets for nutraceuticals, functional food, specialty fine ingredients for infant nutrition, especially infant formulas, and clinical nutrition for the elderly as important to its future growth. The subjecting of these markets to increased regulation could give rise to additional expenses which might have an adverse effect on Frutarom’s business, operating results and financial condition.

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

 

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FORWARD-LOOKING STATEMENTS

Statements in this prospectus supplement and the documents incorporated by reference, which are not historical facts or information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management’s current assumptions, estimates and expectations and include statements concerning (i) our ability to achieve long-term sustainable growth and increase shareholder value, (ii) growth potential in the emerging markets, (iii) the anticipated impact of our acquisitions on our market position within key markets, (iv) our competitive position in the market and expected financial results in 2018, (v) expected savings from profit improvement initiatives, (vi) expected capital expenditures and cost pressures in 2018, (vii) the impact of the Tax Cuts and Jobs Act (the “Tax Act”) on the Company’s effective tax rate in 2018, (viii) the expected level of share repurchases under the Company’s share repurchase program, (ix) our ability to innovate and execute on specific consumer trends and demands, (x) timing of completion or relocation of our plants in China, (xi) expected increases in raw material costs in 2018, (xii) the impact of operational performance, cost reduction efforts and mix enhancement on margin improvement, and (xiii) the amount of expected pension contributions in 2018. These forward-looking statements should be evaluated with consideration given to the many risks and uncertainties inherent in our business that could cause actual results and events to differ materially from those in the forward-looking statements. Certain of such forward-looking information may be identified by such terms as “expect,” “anticipate,” “believe,” “intend,” “outlook,” “may,” “estimate,” “should,” and “predict” and similar terms or variations thereof. Such forward-looking statements are based on a series of expectations, assumptions, estimates and projections about the Company, are not guarantees of future results or performance, and involve significant risks, uncertainties and other factors, including assumptions and projections, for all forward periods. Our actual results may differ materially from any future results expressed or implied by such forward-looking statements. Such factors include, among others, those discussed in the “Risk Factors” section of this prospectus supplement and the following:

 

   

the impact of the Merger;

 

   

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

 

   

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

 

   

the impact of a disruption in our manufacturing operations;

 

   

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

 

   

our ability to implement our Vision 2020 strategy;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

 

   

our ability to attract and retain talented employees;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

our ability to protect our intellectual property rights;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the Company (such as in our other filings with the SEC or in company press releases) for other factors that may cause actual results to differ materially from those projected by the Company. For additional information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see “Risk Factors” in this prospectus supplement and the accompanying prospectus, as well as the risks described in the “Risk Factors” section of the Company’s most recent Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q and as may be included from time to time in our reports filed with the SEC.

The Company intends its forward-looking statements to speak only as of the time of such statements and does not undertake or plan to update or revise them as more information becomes available or to reflect changes in expectations, assumptions or results. The Company can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or

 

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more of the risk factors or risks and uncertainties referred to in this prospectus supplement and the accompanying prospectus, or included in any of our periodic reports filed with the SEC and incorporated by reference into this prospectus supplement could materially and adversely impact our results of operations, financial condition and liquidity and our future financial results.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this Units offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $726 million (or up to approximately $799 million if the underwriters exercise their option to purchase additional Units). We intend to use the net proceeds from this offering, together with the net proceeds from the concurrent common stock offering, the Debt Financings and cash on hand to finance the Merger and to pay related fees and expenses. If for any reason the Merger is not consummated, we intend to use the net proceeds from this offering, after payment of any cash redemption amount and/or repurchase price, for general corporate purposes. See “Summary—Recent Developments.”

Completion of this Units offering is not contingent on completion of the concurrent common stock offering, the Debt Financings or the Merger. The concurrent common stock offering, the Debt Financings and the Merger are not contingent on the completion of this Units offering. However, if the closing of the Merger has not occurred on or prior to February 7, 2019, or if, prior to such date, the Merger Agreement is terminated, we may elect to redeem all, but not less than all, of the outstanding purchase contracts on the terms described under “Description of the Purchase Contracts—Merger Termination Redemption”. If we elect to exercise our merger termination redemption option, then holders of the amortizing notes will have the right to require us to repurchase some or all of their amortizing notes on the terms described under “Description of the Amortizing Notes—Repurchase of Amortizing Notes at the Option of the Holder”.

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

 

Sources of Funds

    

Uses of Funds

 
(in millions)                  

Cash and cash equivalents

     $241      Merger consideration(2)     $6,189  

New Term Loan

     350      Merger and offering fees and expenses(3)     179  

New Notes(1)

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

Common stock offering(1)

     1,500      Breakage costs related to debt repayment(6)     40  

Units offered hereby(1)

     750      General corporate purposes     40  

Equity consideration to Frutarom shareholders and option holders(2)

     1,904       
  

 

 

      

 

 

 

Total Sources

     $7,495      Total Uses     $7,495  
  

 

 

      

 

 

 

 

 

(1)

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

(2)

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

(3)

Includes estimated underwriting discounts and expenses of this Units offering, the concurrent common stock offering and the Debt Financings and the Merger.

(4)

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

(5)

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

(6)

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

 

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CAPITALIZATION

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

 

   

on an actual basis;

 

   

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

 

   

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

 

   

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

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

 

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

Cash and cash equivalents

   $ 322,423      $ 1,048,548      $ 2,504,798      $ 296,947  
  

 

 

 

Commercial paper

                           
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt:

           

Credit facilities

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

Series B, C, D Senior Notes(1)

     249,776        249,776        249,776         

3.20% Senior Notes due 2023

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

1.75% Senior Notes due 2024

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

4.375% Senior Notes due 2047

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

Senior amortizing notes that are components of the Units(2)

            122,778        122,778        122,778  

New Notes

                          2,732,116  

New Term Loan

                          347,429  

Other

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

Total debt(3)

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

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Shareholders’ equity:

        

Common stock

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

Capital in excess of par value(4)

     167,432       770,779       2,225,589       3,428,168  

Retained earnings

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

Accumulated other comprehensive loss

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

Treasury stock, at cost

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

Total shareholders’ equity(5)

     1,749,855       2,353,202       3,809,452       5,622,576  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 3,473,544       4,199,669     $ 5,655,919     $ 10,298,812  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)

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

(2)

Each Unit will include an amortizing note, as described under “Description of the Units.” Approximately 17% of the stated amount of the Units is represented by the amortizing notes.

(3)

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

(4)

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

(5)

Does not include noncontrolling interest.

 

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PRICE RANGE OF COMMON STOCK AND DIVIDENDS

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

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

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

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

 

     High      Low      Dividends
declared per
share
 

Fiscal Year 2018:

        

First Quarter

   $                 156.87      $                 132.60      $                 0.69  

Second Quarter

     143.04        122.13        0.69  

Third Quarter (through September 12, 2018)

     134.45        122.95        0.73  

Fiscal Year 2017:

        

First Quarter

   $ 136.89      $ 115.26      $ 0.64  

Second Quarter

     139.73        128.98        0.64  

Third Quarter

     145.01        131.69        0.69  

Fourth Quarter

     155.44        144.47        0.69  

Fiscal Year 2016:

        

First Quarter

   $ 122.38      $ 97.24      $ 0.56  

Second Quarter

     131.30        114.65        0.56  

Third Quarter

     143.43        124.77        0.64  

Fourth Quarter

     143.64        116.64        0.64  

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

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

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

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

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

 

   

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

 

   

Conforming accounting policies and presentation;

 

   

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

 

   

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

 

   

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

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

The unaudited pro forma condensed combined financial information presented is for informational purposes only and is not necessarily indicative of the financial position or results of operations that would have been

 

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realized if the merger had been completed on the dates set forth above, nor is it indicative of future results or financial position of the combined company. Additionally, the final determination of the purchase price and the purchase price allocation, upon the completion of the merger, will be based on Frutarom’s net assets acquired as of that date and will depend on a number of factors that cannot be predicted with certainty at this time. The unaudited pro forma condensed combined financial information does not reflect any anticipated synergies or dis-synergies, operating efficiencies or cost savings that may result from the merger or potential divestitures that may occur prior to, or subsequent to, the completion of the merger or any acquisition and integration costs that may be incurred. The pro forma adjustments, which IFF believes are reasonable under the circumstances, are preliminary and are based upon available information and certain assumptions described in the accompanying notes to the unaudited pro forma condensed combined financial information. Actual results and valuations may differ materially from the assumptions within the accompanying unaudited pro forma condensed combined financial information. Any changes to IFF’s stock price, from September 5, 2018 through the date the merger is completed, will also change the purchase price, which may include the recording of a lower or higher amount of goodwill. The final adjustments may be materially different from the pro forma condensed combined financial statements presented in this document.

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

 

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Unaudited Pro Forma Condensed Combined Balance Sheet

As of June 30, 2018

 

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

Assets

             

Current Assets:

             

Cash and Cash Equivalents

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

Trade receivables, net

    723,855       321,797                       1,045,652  

Inventory

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

Prepaid expenses and other current assets

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

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Current Assets

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

Property, plant and equipment, net

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

Goodwill

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

Other intangible assets, net

    391,426       442,647       2,027,3534                 2,861,426  

Deferred income taxes assets

    82,204       4,512                       86,716  

Other assets

    157,017       41,054                       198,071  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Assets

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

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

Current Liabilities:

             

Short term borrowings

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

Accounts payable

    315,656       225,998                       541,654  

Dividends payable

    54,488             10,843       3               65,331  

Other current liabilities

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

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Current Liabilities

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

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Long-term debt

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

Retirement liabilities

    226,221       33,690                       259,911  

Deferred income tax liabilities

          66,234       390,270       6d               456,504  

Other liabilities

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

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Other Liabilities

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

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Redeemable Noncontrolling Interest

          131,398                       131,398  

Shareholders’ Equity:

             

Common Stock

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

Capital in excess of par value

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

Treasury stock, at cost

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

Other equity

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

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Shareholders’ Equity

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

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Noncontrolling interest

    6,348       4,546                       10,894  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Shareholders’ Equity including NCI

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

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total Liabilities and Shareholders’ Equity

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

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

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

 

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Unaudited Pro Forma Condensed Combined Statement of Operations

For the Six Months Ended June 30, 2018

 

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

Revenue:

                

Net sales

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

Cost of goods sold

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Gross profit

     804,525       319,182                         1,123,707  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Expenses:

                

Research and development expenses

     153,244       30,770                         184,014  

Selling and administrative expenses

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

Restructuring and other charges, net

     1,903                               1,903  

Amortization of acquisition-related intangibles

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

Gain on sales of fixed assets

     1,195       (691                       504  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total expenses

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Operating profit

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

Other income (expense):

                        

Interest expense

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

Other (income) expense, net

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total other (income) expense

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

 

 

   

 

 

   

 

 

      

 

 

      

Income before taxes

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

Taxes on income

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net income (Including Noncontrolling Interests)

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

Less: noncontrolling interests

           3,204                         3,204  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net Income

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net income per
share—basic

     2.89       1.61               $ 2.34  

Net income per
share—diluted

     2.87       1.63               $ 2.31  

Basic shares outstanding

     79,041       59,530                 111,564  

Diluted shares outstanding

     79,347       60,339                 113,045  

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

 

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Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2017

 

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

Revenue:

                

Net sales

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

Cost of goods sold

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Gross profit

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Expenses:

                

Research and development expenses

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

Selling and administrative expenses

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

Restructuring and other charges, net

     19,711       (340                       19,371  

Amortization of acquisition-related intangibles

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

Gain on sales of fixed assets

     (184     1,934                         1,750  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total expenses

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Operating profit

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

Other (income) expense:

                

Interest expense

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

Other (income) expense, net

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total other (income) expense

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Income before taxes

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

Taxes on income

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net income (Including Noncontrolling Interests)

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

Less: noncontrolling interests

           4,895                         4,895  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net Income

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

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Net income per
share—basic

     3.73       2.49                 2.56  

Net income per
share—diluted

     3.72       2.48                 2.54  

Basic shares outstanding

     79,070       59,342                 111,593  

Diluted shares outstanding

     79,370       59,632                 113,068  

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

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

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

Note 1—Description of Business Combination

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

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

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

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

Note 2—Basis of Presentation

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

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

 

   

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

 

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

 

   

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

 

   

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

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

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

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

Note 3—Estimated Purchase Price

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

 

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

 

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

Estimated Frutarom’s shares outstanding(i)

        59,654,657  

Cash consideration per share(ii)

        71.19  
     

 

 

 

Total cash paid to shareholders of Frutarom

      $ 4,246,815  

Estimated cash paid to vested stock option holders(iii)

        11,458  

Estimated accrual for unvested stock option holders(iv)

        16,392  

Estimated closing dividend payable(v)

        10,843  
     

 

 

 

Estimated cash portion of purchase price

     A      $ 4,285,508  
     

 

 

 

Estimated Frutarom’s shares outstanding

        59,654,657  

Exchange ratio(vi)

        0.249  

Total common shares of IFF to be issued(viii)

        14,854,010  

IFF’s share price(vii)

        127.72  
     

 

 

 

Total equity consideration paid to shareholders of Frutarom

        1,897,154  

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

        6,815  
     

 

 

 

Estimated equity portion of purchase price

     B      $ 1,903,969  
     

 

 

 

Total estimated consideration to be paid

     A+B      $ 6,189,477  
     

 

 

 

 

(i)

Number of shares outstanding as of June 30, 2018.

(ii)

Cash consideration per share as per the merger agreement.

(iii)

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

(iv)

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

(v)

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

(vi)

Exchange ratio as set forth in the merger agreement.

(vii)

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

(viii)

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

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

 

     Purchase Price      Estimated Goodwill  

As presented in the pro forma combined financial statements

     6,189,477        4,219,312  

10% increase in common stock price

     6,380,771        4,410,606  

10% decrease in common stock price

     5,998,183        4,028,018  

Note 4—Preliminary Purchase Price Allocation

Under the acquisition method of accounting, Frutarom’s assets and liabilities will be recorded at fair value at the date of the completion of the merger and combined with the historical carrying amounts of the assets and

 

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

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

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

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

 

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

Purchase Consideration

           6,189,477  

Identifiable net assets:

        

Inventories

     338,881        33,119        372,000  

Property, plant and equipment

     336,591               336,591  

Identifiable intangible assets

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

Deferred tax assets

     4,512               4,512  

All other assets (excluding goodwill)

     510,607               510,607  

Existing contingent consideration

     (42,186      2,186        (40,000

Transaction bonus

            (30,000      (30,000

Deferred tax liabilities

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

All other liabilities

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

 

 

    

 

 

    

 

 

 

Total identifiable net assets

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

Redeemable Noncontrolling interest

     (131,397             (131,397

Noncontrolling interest

     (4,546             (4,546

Goodwill

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

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

 

 

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

 

     Estimated Useful
Life
     Amount  

Product Formulas

     10 years      $ 340,000  

Trade name

     20 years        130,000  

Customer relationships

     20 years        2,000,000  
     

 

 

 

Total identifiable intangible assets

      $ 2,470,000  
     

 

 

 

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

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

 

     Pre-combination
expense
     Post-combination
expense
 

CEO

   $ 20,000         

Selected employees

     10,000        10,000  
  

 

 

    

 

 

 

Total bonus

   $ 30,000      $ 10,000  
  

 

 

    

 

 

 

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

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

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

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

 

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

UNAUDITED FRUTAROM US GAAP BALANCE SHEET

As of June 30, 2018

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

Assets

           

Current Assets:

           

Cash and Cash Equivalents

  $ 119,807                     $ 119,807  

Accounts receivable:

                   

Trade

    296,906       (296,906     5a                

Other

    24,891       (24,891     5a                

Trade receivables, net

      321,797       5a               321,797  

Prepaid expenses and advances to suppliers

    27,949       (27,949     5b                

Prepaid expenses and other current assets

      27,949       5b               27,949  

Inventory

    338,881                       338,881  
 

 

 

   

 

 

     

 

 

     

 

 

 
    808,434                       808,434  
 

 

 

   

 

 

     

 

 

     

 

 

 

Non-Current Assets:

           

Property, plant and equipment

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

Intangible assets

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

Goodwill

          589,250       5c               589,250  

Investment in associates and available for sale assets

    27,481       (27,481     5d                

Deferred income tax assets

    4,512                       4,512  

Others

    13,573       (13,573     5d                

Other assets

      41,054       5d               41,054  
 

 

 

   

 

 

     

 

 

     

 

 

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

 

 

   

 

 

     

 

 

     

 

 

 

Total Assets

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

 

 

   

 

 

     

 

 

     

 

 

 

Liabilities and equity

           

Current liabilities

           

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

    397,601       (397,601     5e                

Short-term borrowings

          397,601       5e               397,601  

Accounts payable:

                   

Trade

    104,565       (104,565     5f            

Other

    156,365       (156,365     5g                

Accounts Payable

          225,998       5f, 5g               225,998  

Leases

    7,757               (7,757   5o      

Dividends payable

                           

Other current liabilities

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

 

 

   

 

 

     

 

 

     

 

 

 
    666,288               (16,329       649,959  
 

 

 

   

 

 

     

 

 

     

 

 

 

 

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

NON-CURRENT LIABILITIES:

           

Long-term loans, net of current maturities

    399,833                       399,833  

Retirement benefit obligations, net

    33,690                       33,690  

Deferred income tax liabilities

    66,234                   66,234  

Leases

    25,322               (25,322   5o      

Liability for shareholders of subsidiaries and other

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

Other liabilities

          19,802     5h             19,802  
 

 

 

   

 

 

     

 

 

     

 

 

 
    667,706               (148,147       519,559  
 

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL LIABILITIES

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

Redeemable Noncontrolling Interest

          131,397     5n     131,397  

Equity attributable to owners of the parent:

           

Ordinary shares

    17,094                       17,094  

Other capital surplus

    116,132       (116,132   5i              

Capital in excess of par value

      116,132     5i             116,132  

Translation differences

    (85,299     85,299     5j              

Retained earnings

    872,640       (872,640   5j              

Less-cost of company shares held by the company

    (3,693     3,693     5j              

Treasury stock, at cost

          (3,693   5j             (3,693

Other equity

      787,341     5j     153     5n     787,494  
 

 

 

   

 

 

     

 

 

     

 

 

 

Total Shareholders’ Equity

    916,874               153         917,027  

Noncontrolling interest

    4,546                       4,546  
 

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL EQUITY

  $ 921,420             $ 153       $ 921,573  
 

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL EQUITY AND LIABILITIES

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

 

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UNAUDITED FRUTAROM US GAAP STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2018

 

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

Revenue:

           

Net sales

    786,110                       786,110  

Cost of Sales

    466,928       (466,928   5k              

Cost of goods sold

          466,928     5k             466,928  
 

 

 

   

 

 

     

 

 

     

 

 

 

Gross profit

    319,182                       319,182  

Selling, marketing, research and development expenses—net

    134,697       (134,697   5l              

Research and development expenses

          30,770     5l             30,770  

Selling and administrative expenses

          141,640     5l             141,640  

General and administrative expenses

    51,179       (51,179   5l              

Amortization of acquisition-related intangibles

          13,466     5l             13,466  

Other expenses—net

    (315     315     5l              

Gain on sales of fixed assets

          (691   5l             (691

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

    (1,326     1,326     5l              
 

 

 

   

 

 

     

 

 

     

 

 

 

Income From Operations

    134,947       (950               133,997  

Financial Expenses—net

    12,758       (12,758   5m              

Interest Expense

          12,758     5m             12,758  

Other (income) expense, net

      (950   5l             (950
 

 

 

   

 

 

     

 

 

     

 

 

 

Income Before Taxes on Net Income

    122,189                       122,189  

Income Tax

    23,600                       23,600  
 

 

 

   

 

 

     

 

 

     

 

 

 

Net income (Including Noncontrolling Interests)

    98,589                       98,589  

Less: noncontrolling interests

    756               2,449     5n     3,205  
 

 

 

   

 

 

     

 

 

     

 

 

 

Net Income

    97,833               (2,449       95,384  
 

 

 

   

 

 

     

 

 

     

 

 

 

Net income per share—basic

    1.64               1.61  

Net income per share—diluted

    1.63               1.63  

 

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UNAUDITED FRUTAROM US GAAP STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2017

 

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

Revenue:

           

Net sales

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

Cost of Sales

    837,271       (837,271     5k                

Cost of goods sold

          837,271       5k               837,271  
 

 

 

   

 

 

     

 

 

     

 

 

 

Gross profit

    525,125                       525,125  

Selling, marketing, research and development expenses—net

    220,014       (220,014     5l                

Research and development expenses

          43,644       5l               43,644  

Selling and administrative expenses

          246,332       5l               246,332  

General and administrative expenses

    92,155       (92,155     5l                

Amortization of acquisition-related intangibles

          22,193       5l           22,193  

Restructuring and other charges, net

          (340     5l           (340

Other expenses—net

    3,392       (3,392     5l                

Gain on sales of fixed assets

          1,934       5l               1,934  

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

    (1,402     1,402       5l                
 

 

 

   

 

 

     

 

 

     

 

 

 

Income From Operations

    210,966       396                 211,362  

Financial Expenses—net

    24,606       (24,606     5m                

Interest Expense

          10,075       5m               10,075  

Other (income) expense, net

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

 

 

   

 

 

     

 

 

     

 

 

 

Income Before Taxes on Net Income

    186,360               1,602         187,962  
 

 

 

   

 

 

     

 

 

     

 

 

 

Income Tax

    34,797               308     5p     35,105  
 

 

 

   

 

 

     

 

 

     

 

 

 

Net income (Including Noncontrolling Interests)

    151,563               1,294         152,857  

Less: noncontrolling interests

    1,884               3,011     5n     4,895  
 

 

 

   

 

 

     

 

 

     

 

 

 

Net Income

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

 

 

   

 

 

     

 

 

     

 

 

 

Net income per share—basic

  $ 2.52             $ 2.49  

Net income per share—diluted

  $ 2.51             $ 2.48  

 

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

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

Balance sheet items:

 

a)

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

 

b)

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

 

c)

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

 

d)

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

 

e)

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

 

f)

Accounts payable: Trade has been reclassified to Accounts Payable;

 

g)

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

 

h)

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

 

i)

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

 

j)

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

 

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Statement of income items:

 

k)

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

 

l)

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

 

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

IFF’s Presentation

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

Selling, marketing, research and development expenses—net

  $ 220,014     $ 134,697     Research and development expenses    $ 43,644     $ 30,770  

General and administrative expenses

    92,155       51,179     Selling and administrative expenses      246,332       141,640  

Other expenses—net

    3,392       (315   Restructuring and other charges, net      (340      

Group’s share of earnings of companies accounted

    (1,402     (1,326   Amortization of acquisition-related intangibles      22,193       13,466  
      Losses (Gain) on sales of fixed assets      1,934       (691
      Other (income) expense, net      396       (950
 

 

 

   

 

 

      

 

 

   

 

 

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

 

 

   

 

 

      

 

 

   

 

 

 

 

m)

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

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

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

 

n)

Reflects an adjustment to reclassify put option liability as redeemable noncontrolling interest to mezzanine equity. As part of several acquisitions effected by Frutarom, the noncontrolling interest holders of the acquired entities were granted an option to sell (“Put option”) their respective interests to Frutarom. In accordance with IFRS, Frutarom recognized a liability for such put options. Under U.S. GAAP, IFF determined the put options cannot be separated from the noncontrolling interest and the combination of a noncontrolling interest and the redemption feature require classification of such noncontrolling interest as a redeemable noncontrolling interest in the combined balance sheet. Further, those noncontrolling interests which are not currently redeemable but are probable to become redeemable are measured using the present value of the redemption value as of the earliest redemption date and the noncontrolling interests which are currently redeemable are measured at the maximum redemption amount. IFF has reviewed the computation of liabilities for put option under IFRS and determined that the amounts to be recorded for redeemable non-controlling interest under U.S. GAAP would be materially the same as the amount of such liabilities for put

 

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  option recorded under IFRS. Accordingly, the unaudited pro forma condensed combined balance sheet as at June 30, 2018 was adjusted to reclassify the current and non-current portion of liability for put option that represented redeemable portion of noncontrolling interest as mezzanine equity which is presented between total liabilities and shareholders’ equity. In addition, as a result of the reclassification to mezzanine equity, a portion of the profit has been allocated to the relevant NCI in accordance with U.S. GAAP.

 

o)

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

 

p)

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

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

 

Plan Asset

   $ 28,699  

Rate Differential:

  

Expected rate on plan assets

     6.63

Weighted average discount rate

     1.04

Difference in rates

     5.58

Pro forma adjustment

   $ 1,602  

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

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

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

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

 

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Note 6 –Pro Forma Adjustments

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

 

a)

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

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

 

                   Amortization expense  
     Estimated Fair
Value
     Estimated Useful
Life (in Years)
     For the Six
Months Ended
June 30, 2018
    For the Year
Ended

December 31
2017
 

Intangible assets

          

Product formulas

     340,000        10        17,000       34,000  

Trade name

     130,000        20        3,250       6,500  

Customer relationships

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

 

 

       

 

 

   

 

 

 
     2,470,000           70,250       140,500  
  

 

 

         

Less: Historical amortization expense

           (11,838     (23,676
        

 

 

   

 

 

 

Pro forma adjustment

         $ 58,412     $ 116,824  
        

 

 

   

 

 

 

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

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

 

b)

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

 

c)

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

 

d)

The pro forma condensed balance sheet has been adjusted to include the adjustment to deferred tax liabilities, on a preliminary basis, of $390,270 resulting from the pro forma fair value adjustments for inventory, intangible assets (excluding goodwill which is not tax deductible), and liabilities utilizing a

 

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  weighted average statutory rate for the jurisdictions expected to be impacted. Because the tax rate used for these pro forma financial statements is an estimate, it will likely vary from the actual rate in periods subsequent to the completion of the merger and those differences may be material.

 

e)

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

 

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

Common Stock

     (17,094            (17,094

Capital in excess of par value

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

Treasury stock, at cost

     3,693       701,390        705,083  

Other equity

     (787,494            (787,494
  

 

 

   

 

 

    

 

 

 

Total

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

 

 

   

 

 

    

 

 

 

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

 

     Amount     Tax
impact
    Pro forma
adjustment
 

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

     39,838       (8,382     31,456  

Adjustment related to acquisition related cost (Note 6h)

     38,047             38,047  

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

     29,224       (6,838     22,386  

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

     (1,322     278       (1,044
    

 

 

   

 

 

 

Total

     $ (14,942   $ 90,845  
    

 

 

   

 

 

 

 

f)

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

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

IFF has entered into a debt commitment letter with Morgan Stanley Senior Funding, Inc. to obtain a 364-day bridge facility of up to $5,450 million to the extent IFF does not receive $5,450 million of net cash proceeds from the financing arrangements discussed above. This bridge facility is not expected to be utilized, and thus the fee of the bridge facility financing totaling $39.8 million is not included in the calculation of pro forma interest expense but will be considered an acquisition related cost (see Note 6(g)). On June 6, 2018, IFF entered into a term loan credit agreement to replace a portion of the bridge facility, reducing the amount of the bridge facility by $350 million. If IFF is not able to consummate the financing discussed above, and instead must utilize the bridge facility to fund the acquisition, the adjustment to annual interest expense is

 

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expected to be approximately $104.6 million for the six months ended June 30, 2018 and $209.1 million for the year ended December 31, 2017 respectively. Financial expenses related to the amortization of the fee for bridge financing recognized by IFF during the six months ended June 30, 2018, amounting to $10.6 million, have been removed for pro forma purposes, since it does not have a continuing impact (see Note 6(h)). In addition, the accrual created by the Company for the bridge financing fee of $12 million as of June 30, 2018 has been reversed to reflect the total impact of estimated bridge facility financing to cash and retained earnings on pro forma balance sheet (see Note 6(l))

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

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

 

     As of June 30, 2018  

Term loan

     350,000  

Senior notes

     2,750,000  

Debt portion of TEUs

     127,322  

Debt issuance costs

     (24,508

Extinguishment of Frutarom’s existing debt

     (797,434

Repayment of IFF’s existing debt

     (249,776
  

 

 

 

Pro forma adjustment

   $ 2,155,604  
  

 

 

 

Allocated to:

  

Short-term borrowings

     194,611  

Long-term debt

     1,960,993  
  

 

 

 

Pro forma adjustment

   $ 2,155,604  
  

 

 

 

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

 

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

Common Stock

     1,468               1,468  

Capital in excess of par value

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

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

 

 

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

 

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

Interest expense on Term Loan

     4,528       12,679  

Interest expense TEU notes

     2,268       6,216  

Interest on Senior Notes

     41,057       91,465  

Frutarom Interest Expense

     (10,600     (10,075

Retirement of IFF Senior Notes

     (8,219     (16,438

Reversal of fee recognized for bridge financing

     (10,576      

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

     24,937        
  

 

 

   

 

 

 

Total pro forma adjustment

   $ 43,395     $ 83,847  
  

 

 

   

 

 

 

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

 

g)

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

 

h)

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

 

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  earnings. The acquisition-related costs recognized by IFF during the six months ended June 30, 2018, have been eliminated from the pro forma statement of operation, since it does not have a continuing impact. The adjustment related to acquisition-related cost in the pro forma financial statements is summarized below:

 

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

Bridge financing fee

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

Acquisition-related cost

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

 

 

      

 

 

 
        $ 62,981        $ 67,271  
       

 

 

      

 

 

 

 

i)

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

 

j)

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

 

k)

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

 

     Pro Forma
adjustment
 

Proceeds from debt financing (Note 6f)

     2,155,605  

Proceeds from equity financing (Note 6f)

     2,059,106  

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

     (39,838

Payment of Acquisition-related cost (Note 6h)

     (62,981

Net payment upon settlement of derivatives (Note 6g)

     1,322  
  

 

 

 

Total

   $ 4,113,214  
  

 

 

 

 

l)

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

 

     Pro Forma
adjustment
 

Tax impact of adjustment posted (Note 6e)

     14,942  

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

     12,000  

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

     9,850  
  

 

 

 

Total

   $ 36,792  
  

 

 

 

Note 7—Pro Forma Earnings Per Share

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

 

  (a)

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

 

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  (b)

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

 

  (c)

the dilutive impact of equity portion of the tangible equity units for the year ended December 31, 2017 and the six months ended June 30, 2018 (in USD thousands, except per share amounts):

 

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

Pro forma net profit attributable to stockholders

     285,857        261,176  

Weighted average number of IFF shares outstanding—Basic

     79,070        79,041  

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

     14,907        14,907  

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

     11,744        11,744  

Common stock issuable upon conversion of Tangible equity units

     5,872        5,872  
  

 

 

    

 

 

 

Pro forma weighted average number shares outstanding—Basic

     111,593        111,564  

Weighted average number of IFF shares outstanding—Diluted

     79,370        79,347  

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

     14,907        14,907  

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

     11,744        11,744  

Diluted common stock issuable upon conversion of Tangible equity units

     7,047        7,047  
  

 

 

    

 

 

 
     113,068        113,045  

Pro forma net income per share of common stock—Basic

     2.56        2.34  

Pro forma net income per share of common stock—Diluted

     2.54        2.31  

 

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DESCRIPTION OF THE UNITS

We are offering 15,000,000 Units (or up to 16,500,000 Units if the underwriters exercise their option to purchase additional Units), each with a stated amount of $50. Each Unit is comprised of a prepaid stock purchase contract (a “purchase contract”) issued by us and a senior amortizing note issued by us. The following summary of the terms of the Units, the summary of the terms of the purchase contracts set forth under the caption “Description of the Purchase Contracts” and the summary of the terms of the amortizing notes set forth under the caption “Description of the Amortizing Notes” in this prospectus supplement and under the caption “Description of Debt Securities” in the accompanying prospectus contain a description of all of the material terms of the Units and their components but are not complete and are subject to, and qualified in their entirety by reference to, the related contracts. We refer you to:

 

   

the purchase contract agreement (the “purchase contract agreement”), to be dated the date of first issuance of the Units, to be entered into among us, U.S. Bank National Association, as purchase contract agent (the “purchase contract agent”) and attorney-in-fact for the holders of purchase contracts from time to time, and U.S. Bank National Association, as trustee (the “trustee”) under the indenture described below, pursuant to which the purchase contracts and Units will be issued; and

 

   

the indenture dated as of March 2, 2016, between us, as issuer, and U.S. Bank National Association, as trustee, and a related supplemental indenture, to be dated the date of first issuance of the Units, between us, as issuer, and U.S. Bank National Association, as trustee, under which the amortizing notes will be issued.

The indenture has been filed as an exhibit to the registration statement of which this prospectus supplement forms a part, and the related supplemental indenture for the amortizing notes and the purchase contract agreement will be filed as exhibits to a current report on Form 8-K and incorporated by reference as exhibits to that registration statement. Whenever particular sections or defined terms are referred to, such sections or defined terms are incorporated herein by reference.

As used in this section, the terms “we,” “us” and “our” mean International Flavors & Fragrances Inc. and do not include any subsidiary of International Flavors & Fragrances Inc.

Components of the Units

Each Unit offered is comprised of:

 

   

a prepaid stock purchase contract issued by us pursuant to which we will deliver to the holder, not later than September 15, 2021 (subject to postponement in certain limited circumstances, the “mandatory settlement date”), unless earlier redeemed or settled, a number of shares of our common stock, par value $0.125 per share (the “common stock”) per purchase contract equal to the settlement rate described below under “Description of the Purchase Contracts—Delivery of Common Stock;” and

 

   

a senior amortizing note issued by us with an initial principal amount of $8.45436 that pays equal quarterly installments of $0.75000 per amortizing note (except for the December 15, 2018 installment payment, which will be $0.73333 per amortizing note), which cash payment in the aggregate will be equivalent to 6.00% per year with respect to the $50 stated amount per Unit.

Unless previously settled at your option as described in “Description of the Purchase Contracts—Early Settlement” or “Description of the Purchase Contracts—Early Settlement Upon a Fundamental Change,” settled at our option as described in “Description of the Purchase Contracts—Early Settlement at Our Election” or redeemed at our option as described in “Description of the Purchase Contracts—Merger Termination Redemption,” we will deliver to you not more than 0.3839 shares and not less than 0.3134 shares of our common

 

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stock on the mandatory settlement date, based upon the applicable “settlement rate” (as defined below), which is subject to adjustment as described herein, and the “applicable market value” (as defined below) of our common stock, as described below under “Description of the Purchase Contracts—Delivery of Common Stock.”

Each amortizing note will have an initial principal amount of $8.45436. On each March 15, June 15, September 15 and December 15, commencing on December 15, 2018, we will pay equal cash installments of $0.75000 on each amortizing note (except for the December 15, 2018 installment payment, which will be $0.73333 per amortizing note). Each installment will constitute a payment of interest (at a rate of 3.79% per annum) and a partial repayment of principal on the amortizing note, allocated as set forth on the amortization schedule set forth under “Description of the Amortizing Notes—Amortization Schedule.”

The stated amount of each Unit must be allocated between the amortizing note and the purchase contract based upon their relative fair market values. We have determined that the fair market value of each amortizing note is $8.45436 and the fair market value of each purchase contract is $41.54564, as set forth in the purchase contract agreement. Each holder agrees to such allocation and this position will be binding upon each holder (but not on the Internal Revenue Service).

Separating and Recreating Units

Upon the conditions and under the circumstances described below, a holder of a Unit will have the right to separate a Unit into its component parts, and a holder of a separate purchase contract and a separate amortizing note will have the right to combine the two components to recreate a Unit.

Separating Units

At initial issuance, the purchase contracts and amortizing notes may be purchased and transferred only as Units and will trade under the CUSIP number for the Units.

On any business day during the period beginning on, and including, the business day immediately following the date of initial issuance of the Units to, but excluding, the second scheduled trading day immediately preceding September 15, 2021 or, if earlier, the second scheduled trading day immediately preceding any “early mandatory settlement date” (as defined under “Description of the Purchase Contracts”) or any “merger redemption settlement date” (as defined under “Description of the Purchase Contracts”) and also excluding the business day immediately preceding any installment payment date (provided, the right to separate the Units shall resume after such business day), you will have the right to separate your Unit into its constituent purchase contract and amortizing note (which we refer to as a “separate purchase contract” and a “separate amortizing note,” respectively, and which will thereafter trade under their respective CUSIP numbers), in which case that Unit will cease to exist. If you beneficially own a Unit, you may separate it into its component purchase contract and component amortizing note by delivering written instructions to the broker or other direct or indirect participant through which you hold an interest in your Unit (your “participant”) to notify The Depository Trust Company (“DTC”) through DTC’s Deposit/Withdrawal at Custodian (“DWAC”) system of your desire to separate the Unit. Holders who elect to separate a Unit into its constituent purchase contract and amortizing note shall be responsible for any fees or expenses payable in connection with such separation.

“Business day” means any day other than a Saturday, Sunday or any day on which banking institutions in New York, New York are authorized or obligated by applicable law or executive order to close or be closed.

Separate purchase contracts and separate amortizing notes will be transferable independently from each other.

Recreating Units

On any business day during the period beginning on, and including, the business day immediately following the date of initial issuance of the Units to, but excluding, the second scheduled trading day immediately

 

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preceding September 15, 2021 or, if earlier, the second scheduled trading day immediately preceding any early mandatory settlement date or merger redemption settlement date and also excluding the business day immediately preceding any installment payment date (provided, the right to recreate the Units shall resume after such business day), you may recreate a Unit from your separate purchase contract and separate amortizing note. If you beneficially own a separate purchase contract and a separate amortizing note, you may recreate a Unit by delivering written instruction to your participant to notify DTC through DTC’s DWAC system of your desire to recreate the Unit. Holders who elect to recreate Units shall be responsible for any fees or expenses payable in connection with such recreation.

Global Securities

Your Unit, purchase contract and amortizing note will be represented by global securities registered in the name of a nominee of DTC. You will not be entitled to receive definitive physical certificates for your Units, purchase contracts or amortizing notes, except under the limited circumstances described under “Book-Entry Procedures and Settlement.” Beneficial interests in a Unit and, after separation, the separate purchase contract and separate amortizing note will be represented through book-entry accounts of, and transfers will be effected through, direct or indirect participants in DTC.

Deemed Actions by Holders by Acceptance

Each holder of Units or separate purchase contracts, by acceptance of such securities, will be deemed to have:

 

   

irrevocably authorized and directed the purchase contract agent to execute, deliver and perform on its behalf the purchase contract agreement, and appointed the purchase contract agent as its attorney-in-fact for any and all such purposes;

 

   

in the case of a purchase contract that is a component of a Unit, or that is evidenced by a separate purchase contract, irrevocably authorized and directed the purchase contract agent to execute, deliver and hold on its behalf the separate purchase contract or the component purchase contract evidencing such purchase contract, and appointed the purchase contract agent as its attorney-in-fact for any and all such purposes;

 

   

consented to, and agreed to be bound by, the terms and provisions of the purchase contract agreement; and

 

   

in the case of a holder of a Unit, agreed, for all purposes, including U.S. federal income tax purposes, to treat:

 

   

a Unit as an investment unit composed of two separate instruments, in accordance with its form;

 

   

the amortizing notes as indebtedness of ours; and

 

   

the allocation of the $50 stated amount per Unit between the purchase contract and the amortizing note so that such holder’s initial tax basis in each purchase contract will be $41.54564 and such holder’s initial tax basis in each amortizing note will be $8.45436.

Listing of Securities

We have applied to list the Units on the NYSE under the symbol “IFFT,” subject to satisfaction of its minimum listing standards with respect to the Units. However, we can give no assurance that the Units will be so listed. If the Units are approved for listing, we expect that the Units will begin trading on the NYSE within 30

 

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calendar days after the Units are first issued. In addition, the underwriters have advised us that they intend to make a market in the Units, but the underwriters are not obligated to do so. However, listing on the NYSE does not guarantee that a trading market will develop, and the underwriters may discontinue market making at any time in their sole discretion without notice. Accordingly, we cannot assure you that a liquid trading market will develop for the Units (or, if developed, that a liquid trading market will be maintained), that you will be able to sell Units at a particular time or that the prices you receive when you sell will be favorable.

We will not initially apply to list the separate purchase contracts or the separate amortizing notes on any securities exchange or automated inter-dealer quotation system. If (i) a sufficient number of Units are separated into separate purchase contracts and separate amortizing notes and traded separately such that applicable listing requirements are met and (ii) a sufficient number of holders of such separate purchase contracts and separate amortizing notes request that we list such separate purchase contracts and separate amortizing notes, we may endeavor to list such separate purchase contracts and separate amortizing notes on an exchange of our choosing (which may or may not be the NYSE) subject to applicable listing requirements.

Our common stock is listed on the NYSE and Euronext Paris under the symbol “IFF.” We have applied to have the shares of our common stock deliverable upon settlement of all purchase contracts approved for listing on the NYSE.

Title

We and the purchase contract agent will treat the registered owner, which we expect at initial issuance to be a nominee of DTC, of any Unit or separate purchase contract or amortizing note as the absolute owner of the Unit or separate purchase contract or amortizing note for the purpose of settling the related purchase contracts or amortizing note and for all other purposes.

Accounting for the Units

We expect to record the issuance of the purchase contract portion of the Units as additional paid-in-capital, net of issuance costs of the purchase contracts, in our financial statements. We also expect to record the amortizing notes portion of the Units as long-term debt and to record the issuance costs of the amortizing notes as an adjustment to the carrying amount of the amortizing notes. The amortization of the amortizing notes will be calculated using the effective interest method over the life of the amortizing notes. We will allocate the proceeds from the issuance of the Units to the purchase contracts and amortizing notes based on the relative fair values of the respective components, determined as of the date of issuance of the Units. We have determined that the allocation of the purchase price of each Unit as between the amortizing note and the purchase contract will be $8.45436 for the amortizing note and $41.54564 for the purchase contract, as set forth in the purchase contract agreement.

Based on the expected structure of the Units, IFF expects the purchase contracts to meet equity classification, which has been reflected as such in the unaudited pro forma condensed combined balance sheet presented in “Unaudited Pro Forma Condensed Combined Financial Information” in this prospectus supplement. The classification of the Units will be subject to detailed assessment once finalized and a different conclusion may result in a material impact on the information presented in “Unaudited Pro Forma Condensed Combined Financial Information” in this prospectus supplement.

Based on U.S. GAAP, we do not expect the purchase contract component of the Units to be revalued under fair value accounting principles.

Our earnings per share calculations will reflect the shares issuable upon settlement of the purchase contracts portion of the Units. Our basic earnings per share will include the minimum shares issuable under the purchase contract for each period and our diluted earnings per share will include any incremental shares that would be issuable assuming a settlement of the purchase contract at the end of each accounting period, if dilutive.

 

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Replacement of Unit Certificates

In the event that physical certificates evidencing the Units have been issued, any mutilated Unit certificate will be replaced by us at the expense of the holder upon surrender of the certificate to the purchase contract agent. Unit certificates that become destroyed, lost or stolen will be replaced by us at the expense of the holder upon delivery to us and the purchase contract agent of evidence of their destruction, loss or theft satisfactory to us and the purchase contract agent. In the case of a destroyed, lost or stolen Unit certificate, an indemnity satisfactory to us and the purchase contract agent may be required at the expense of the holder of the Units before a replacement will be issued.

Notwithstanding the foregoing, we will not be obligated to replace any Unit certificates on or after the second scheduled trading day immediately preceding September 15, 2021 or any early settlement date or merger redemption settlement date. In those circumstances, the purchase contract agreement will provide that, in lieu of the delivery of a replacement Unit certificate, we, upon delivery of the evidence and indemnity described above, will deliver or arrange for delivery of the shares of common stock issuable (and/or, in the case of a merger redemption settlement date, make the required cash payment, if any) pursuant to the purchase contracts included in the Units evidenced by the Unit certificate.

Miscellaneous

The purchase contract agreement will provide that we will pay all fees and expenses related to the offering of the Units and the enforcement by the purchase contract agent of the rights of the holders of the Units or the separate purchase contracts or amortizing notes, other than expenses (including legal fees) of the underwriters.

Should you elect to separate or recreate Units, you will be responsible for any fees or expenses payable in connection with that separation or recreation, and we will have no liability therefor.

 

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DESCRIPTION OF THE PURCHASE CONTRACTS

The purchase contracts will be issued pursuant to the terms and provisions of the purchase contract agreement. The following summary of the terms of the purchase contracts contains a description of all of the material terms of the purchase contracts but is not complete and is subject to, and is qualified in its entirety by reference to, all of the provisions of the purchase contract agreement, including the definitions in the purchase contract agreement of certain terms. We refer you to the purchase contract agreement which will be filed as an exhibit to a current report on Form 8-K and incorporated by reference as an exhibit to the registration statement of which this prospectus supplement forms a part. A copy of the purchase agreement will be available as described under “Where You Can Find More Information.”

Each purchase contract will initially form a part of a Unit. Each Unit may be separated by a holder into its constituent purchase contract and amortizing note on any business day during the period beginning on, and including, the business day immediately following the date of initial issuance of the Units to, but excluding, the second scheduled trading day immediately preceding September 15, 2021 or, if earlier, the second scheduled trading day immediately preceding any “early mandatory settlement date” or any “merger redemption settlement date.” Following such separation, purchase contracts may be transferred separately from amortizing notes.

As used in this section, the terms “we,” “us” and “our” mean International Flavors & Fragrances Inc. and do not include any subsidiary of International Flavors & Fragrances Inc.

Delivery of Common Stock

Unless previously redeemed or settled early at your or our option, for each purchase contract we will deliver to you on September 15, 2021 (subject to postponement in certain limited circumstances described below, the “mandatory settlement date”) a number of shares of our common stock. The number of shares of our common stock issuable upon settlement of each purchase contract (the “settlement rate”) will be determined as follows:

 

   

if the applicable market value of our common stock is greater than the threshold appreciation price, then you will receive 0.3134 shares of common stock for each purchase contract (the “minimum settlement rate”);

 

   

if the applicable market value of our common stock is greater than or equal to the reference price but less than or equal to the threshold appreciation price, then you will receive a number of shares of common stock for each purchase contract equal to the Unit stated amount of $50, divided by the applicable market value; and

 

   

if the applicable market value of our common stock is less than the reference price, then you will receive 0.3839 shares of common stock for each purchase contract (the “maximum settlement rate”).

The maximum settlement rate, minimum settlement rate and reference price are each subject to adjustment as described under “—Adjustments to the Fixed Settlement Rates” below. Each of the minimum settlement rate and the maximum settlement rate is referred to as a “fixed settlement rate.”

The reference price is equal to $50 divided by the maximum settlement rate and is approximately equal to $130.25, which is the public offering price of our common stock in the concurrent common stock offering.

The threshold appreciation price is equal to $50 divided by the minimum settlement rate. The threshold appreciation price, which is initially approximately $159.54, represents an appreciation of approximately 22.5% over the reference price.

For illustrative purposes only, the following table shows the number of shares of common stock issuable upon settlement of a purchase contract at assumed applicable market values, based on a reference price of

 

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$130.25 and a threshold appreciation price of $159.54. The table assumes that there will be no adjustments to the fixed settlement rates described under “—Adjustments to the Fixed Settlement Rates” below and that the purchase contracts have not been redeemed as described under “—Merger Termination Redemption” below or settled early at the option of holders or at our option as described under “—Early Settlement,” “—Early Settlement Upon a Fundamental Change” or “—Early Settlement at Our Election” below. We cannot assure you that the actual applicable market value will be within the assumed range set forth below.

A holder of a Unit or a separate purchase contract, as applicable, would receive on the mandatory settlement date the following numbers of shares of common stock for each Unit or separate purchase contract at the following assumed applicable market values:

 

Assumed Applicable Market Value

  

Number of Shares of
Common Stock

$126.00

   0.3839

$128.00

   0.3839

$130.00

   0.3839

$130.25

   0.3839

$132.00

   0.3788

$134.00

   0.3731

$136.00

   0.3676

$138.00

   0.3623

$140.00

   0.3571

$142.00

   0.3521

$144.00

   0.3472

$146.00

   0.3425

$148.00

   0.3378

$150.00

   0.3333

$152.00

   0.3289

$154.00

   0.3247

$156.00

   0.3205

$158.00

   0.3165

$159.54

   0.3134

$160.00

   0.3134

$162.00

   0.3134

$164.00

   0.3134

 

As the above table illustrates, if, on the mandatory settlement date, the applicable market value is greater than the threshold appreciation price, we would be obligated to deliver 0.3134 shares of common stock for each purchase contract. As a result, if the applicable market value exceeds the threshold appreciation price, you will receive only a portion of the appreciation in the market value of the shares of our common stock you would have received had you purchased shares of common stock with $50 at the public offering price in the concurrent common stock offering.

If, on the mandatory settlement date, the applicable market value is less than or equal to the threshold appreciation price but greater than or equal to the reference price of approximately $130.25, we would be obligated to deliver a number of shares of our common stock on the mandatory settlement date equal to $50, divided by the applicable market value. As a result, we would retain all appreciation in the market value of our common stock underlying each purchase contract between the reference price and the threshold appreciation price.

If, on the mandatory settlement date, the applicable market value is less than the reference price of approximately $130.25, we would be obligated to deliver upon settlement of the purchase contract 0.3839 shares

 

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of common stock for each purchase contract, regardless of the market price of our common stock. As a result, the holder would realize a loss on the decline in market value of the common stock below the reference price.

Because the applicable market value of the common stock is determined over the 20 consecutive “trading days” (as defined below) beginning on, and including, the 21st scheduled trading day immediately preceding September 15, 2021, the number of shares of common stock delivered for each purchase contract may be greater than or less than the number that would have been delivered based on the closing price (or daily VWAP) of the common stock on the last trading day in such 20 consecutive trading day period. In addition, you will bear the risk of fluctuations in the market price of the shares of common stock deliverable upon settlement of the purchase contracts between the end of such 20 consecutive trading day period and the date such shares are delivered.

The term “applicable market value” means the arithmetic average of the daily VWAPs of our common stock on each of the 20 consecutive trading days beginning on, and including, the 21st scheduled trading day immediately preceding September 15, 2021.

The “daily VWAP” of our common stock on any trading day means such price per share as displayed under the heading “Bloomberg VWAP” on Bloomberg (or any successor service) page IFF.US <Equity> AQR (or its equivalent successor if such page is not available) in respect of the period from the scheduled open to 4:00 p.m., New York City time, on such trading day; or, if such price is not available, the market value per share of our common stock on such trading day as determined, using a volume-weighted average method, by a nationally recognized independent investment banking firm retained by us for this purpose. The “daily VWAP” will be determined without regard to after-hours trading or any other trading outside of the regular trading session trading hours.

“Trading day” for purposes of determining any consideration due at settlement of a purchase contract means a day on which (i) there is no “market disruption event” (as defined below) and (ii) trading in our common stock (or other security for which a daily VWAP must be determined) generally occurs on the NYSE or, if our common stock (or such other security) is not then listed on the NYSE, on the principal other U.S. national or regional securities exchange on which our common stock (or such other security) is then listed or, if our common stock (or such other security) is not then listed on a U.S. national or regional securities exchange, on the principal other market on which our common stock (or such other security) is then traded. If our common stock (or such other security) is not so listed or traded, “trading day” means a “business day.”

“Scheduled trading day” means a day that is scheduled to be a trading day on the NYSE or, if our common stock is not then listed on the NYSE, on the principal other U.S. national or regional securities exchange on which our common stock is then listed or, if our common stock is not then listed on a U.S. national or regional securities exchange, on the principal other market on which our common stock is then traded. If our common stock is not so listed or admitted for trading, “scheduled trading day” means a “business day.”

“Market disruption event” means (i) a failure by the primary U.S. national or regional securities exchange or market on which our common stock is listed or admitted for trading to open for trading during its regular trading session or (ii) the occurrence or existence prior to 1:00 p.m., New York City time, on any scheduled trading day for our common stock for more than one half-hour period in the aggregate during regular trading hours of any suspension or limitation imposed on trading (by reason of movements in price exceeding limits permitted by the relevant stock exchange or otherwise) in our common stock or in any options contracts or futures contracts relating to our common stock.

On the mandatory settlement date, our common stock will be issued and delivered to you or your designee, upon (i) surrender of certificates representing the purchase contracts, if such purchase contracts are held in certificated form, and (ii) payment by you of any transfer or similar taxes payable in connection with the issuance of our common stock to any person other than you. As long as the purchase contracts are evidenced by one or

 

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more global purchase contract certificates deposited with DTC, procedures for settlement will be governed by DTC’s applicable procedures.

If one or more of the 20 consecutive scheduled trading days beginning on, and including, the 21st scheduled trading day immediately preceding September 15, 2021 is not a trading day, the mandatory settlement date will be postponed until the second scheduled trading day immediately following the last trading day of the 20 consecutive trading day period during which the applicable market value is determined.

Prior to 5:00 p.m., New York City time, on the last trading day of the 20 consecutive trading day period during which the applicable market value is determined, the shares of common stock underlying each purchase contract will not be outstanding, and the holder of such purchase contract will not have any voting rights, rights to dividends or other distributions or other rights of a holder of our common stock by virtue of holding such purchase contract. The person in whose name any shares of our common stock shall be issuable upon settlement of the purchase contract on the mandatory settlement date will be treated as the holder of record of such shares as of 5:00 p.m., New York City time, on the last trading day of the 20 consecutive trading day period during which the applicable market value is determined.

We will pay any documentary, stamp or similar issue or transfer tax due on the issue of any shares of our common stock upon settlement or redemption of the purchase contracts, unless the tax is due because the holder requests any shares to be issued in a name other than the holder’s name, in which case the holder will pay that tax.

Early Settlement

Prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding September 15, 2021, you, as a holder of Units or a holder of a separate purchase contract, may elect to settle your purchase contracts early, in whole or in part, and receive a number of shares of common stock per purchase contract equal to the “early settlement rate.” The early settlement rate is equal to the minimum settlement rate on the early settlement date, subject to adjustment as described below under “—Adjustments to the Fixed Settlement Rates,” unless you elect to settle your purchase contracts early in connection with a fundamental change, in which case you will receive upon settlement of your purchase contracts a number of shares of our common stock based on the “fundamental change early settlement rate” as described under “—Early Settlement Upon a Fundamental Change.”

Your right to receive common stock upon early settlement of a purchase contract is subject to (i) delivery of a written and signed notice of election (an “early settlement notice”) to the purchase contract agent electing early settlement of such purchase contract, (ii) if such purchase contract or the Unit that includes such purchase contract is held in certificated form, surrendering the certificates representing the purchase contract, or if held in global form, surrendering in accordance with DTC’s applicable procedures and (iii) payment by you of any transfer or similar taxes payable in connection with the issuance of our common stock to any person other than you. As long as the purchase contracts or the Units are evidenced by one or more global certificates deposited with DTC, procedures for early settlement will be governed by DTC’s applicable procedures.

Upon surrender of the purchase contract or the related Unit and payment of any applicable transfer or similar taxes due because of any issue of such shares in a name of a person other than the holder, you will receive the applicable number of shares of common stock (and any cash payable for fractional shares) due upon early settlement on the second business day following the “early settlement date” (as defined below).

If you comply with the requirements for effecting early settlement of your purchase contracts earlier than 5:00 p.m., New York City time, on any business day, then that day will be considered the “early settlement date.” If you comply with such requirements at or after 5:00 p.m., New York City time, on any business day or at any time on a day that is not a business day, then the next succeeding business day will be considered the “early

 

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settlement date.” Prior to 5:00 p.m., New York City time, on the early settlement date, the shares of common stock underlying each purchase contract will not be outstanding, and the holder of such purchase contract will not have any voting rights, rights to dividends or other distributions or other rights of a holder of our common stock by virtue of holding such purchase contract. The person in whose name any shares of our common stock shall be issuable upon such early settlement of the purchase contract will be treated as the holder of record of such shares as of 5:00 p.m., New York City time, on the relevant early settlement date.

Upon early settlement at the holder’s election of the purchase contract component of a Unit, the amortizing note underlying such Unit will remain outstanding and beneficially owned by or registered in the name of, as the case may be, the holder who elected to settle the related purchase contract early and will no longer constitute a part of the Unit.

Early Settlement Upon a Fundamental Change

If a “fundamental change” occurs and you elect to settle your purchase contracts early in connection with such fundamental change in accordance with the procedures described under “—Early Settlement” above, you will receive per purchase contract a number of shares of our common stock or cash, securities or other property, as applicable, equal to the “fundamental change early settlement rate,” as described below. An early settlement will be deemed for these purposes to be “in connection with” such fundamental change if you deliver your early settlement notice to the purchase contract agent, and otherwise satisfy the requirements for effecting early settlement of your purchase contracts, during the period beginning on, and including, the effective date of the fundamental change and ending at 5:00 p.m., New York City time, on the 35th business day thereafter (or, if earlier, the second scheduled trading day immediately preceding September 15, 2021) (the “fundamental change early settlement period”). We refer to this right as the “fundamental change early settlement right.”

If you comply with the requirements for effecting early settlement of your purchase contracts in connection with a fundamental change prior to 5:00 p.m., New York City time, on any business day during the fundamental change early settlement period, then that day will be considered the “fundamental change early settlement date.” If you comply with such requirements at or after 5:00 p.m., New York City time, on any business day during the fundamental change early settlement period or at any time on a day during the fundamental change early settlement period that is not a business day, then the next succeeding business day will be considered the “fundamental change early settlement date.”

We will provide the purchase contract agent, the trustee and the holders of Units and separate purchase contracts with a notice of a fundamental change within five business days after its effective date and issue a press release announcing such effective date. The notice will also set forth, among other things, (i) the applicable fundamental change early settlement rate, (ii) if not common stock, the kind and amount of cash, securities and other property receivable by the holder upon settlement and (iii) the deadline by which each holder’s fundamental change early settlement right must be exercised.

A “fundamental change” will be deemed to have occurred upon the occurrence of any of the following:

 

   

any “person” or “group” within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than us, any of our subsidiaries and any of our and their employee benefit plans, files a Schedule TO or any other schedule, form or report under the Exchange Act disclosing that such person or group has become the direct or indirect “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the outstanding shares of our common stock;

 

   

the consummation of (A) any recapitalization, reclassification or change of our common stock (other than changes resulting from a subdivision or combination) as a result of which our common stock would be converted into, or exchanged for, stock, other securities, other property or assets; (B) any share exchange, consolidation or merger of us pursuant to which our common stock will be converted into cash, securities or other property or assets; or (C) any sale, lease or other transfer in one

 

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transaction or a series of transactions of all or substantially all of the consolidated assets of us and our subsidiaries, taken as a whole, to any person other than one of our wholly owned subsidiaries; or

 

   

our common stock (or other common stock receivable upon settlement of your purchase contracts, if applicable) ceases to be listed or quoted on any of the NYSE, the NASDAQ Global Select Market or the NASDAQ Global Market (or any of their respective successors).

A transaction or transactions described in the first two bullets above will not constitute a fundamental change, however, if at least 90% of the consideration received or to be received by our common stockholders (excluding cash payments for fractional shares) in connection with such transaction or transactions consists of shares of common stock that are listed on any of the NYSE, the NASDAQ Global Select Market or the NASDAQ Global Market (or any of their respective successors), or will be so listed when issued or exchanged in connection with such transaction or transactions, and as a result of such transaction or transactions such consideration becomes the consideration receivable upon settlement of your purchase contracts, if applicable, excluding cash payments for fractional shares.

If any transaction in which our common stock is replaced by the securities of another entity occurs, following completion of any related fundamental change early settlement period (or, in the case of a transaction that would have been a fundamental change but for the immediately preceding paragraph, following the effective date of such transaction), references to us in the definition of “fundamental change” above shall instead be references to such other entity.

The “fundamental change early settlement rate” will be determined by us by reference to the table below, based on the date on which the fundamental change occurs or becomes effective (the “effective date”) and the “stock price” in the fundamental change, which will be:

 

   

in the case of a fundamental change described in the second bullet of the definition of “fundamental change” in which all holders of shares of our common stock receive only cash in the fundamental change, the stock price will be the cash amount paid per share of our common stock; and

 

   

in all other cases, the stock price will be the arithmetic average of the daily VWAPs of our common stock over the five consecutive trading day period ending on the trading day immediately preceding the effective date.

The stock prices set forth in the column headings of the table below will be adjusted as of any date on which the fixed settlement rates are adjusted. The adjusted stock prices will equal the stock prices applicable immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the maximum settlement rate immediately prior to the adjustment giving rise to the stock price adjustment and the denominator of which is the maximum settlement rate as so adjusted. The fundamental change early settlement rates per purchase contract in the table below will be adjusted in the same manner and at the same time as the fixed settlement rates as set forth under “—Adjustments to the Fixed Settlement Rates.”

The following table sets forth the fundamental change early settlement rate per purchase contract for each stock price and effective date set forth below:

 

     Stock Price  

Effective Date

   $50.00     $100.00     $130.25     $135.00     $140.00     $159.54     $175.00     $207.40     $225.00     $275.00     $300.00  

September 17, 2018

     0.3223       0.3321       0.3217       0.3197       0.3175       0.3096       0.3052       0.3012       0.3007       0.3016       0.3023  

September 15, 2019

     0.3421       0.3482       0.3337       0.3306       0.3273       0.3153       0.3088       0.3045       0.3044       0.3054       0.3059  

September 15, 2020

     0.3626       0.3671       0.3493       0.3445       0.3392       0.3202       0.3119       0.3084       0.3086       0.3093       0.3096  

September 15, 2021

     0.3839       0.3839       0.3839       0.3704       0.3571       0.3134       0.3134       0.3134       0.3134       0.3134       0.3134  

 

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The exact stock prices and effective dates may not be set forth in the table above, in which case:

 

   

if the applicable stock price is between two stock prices in the table or the applicable effective date is between two effective dates in the table, the fundamental change early settlement rate will be determined by straight line interpolation between the fundamental change early settlement rates set forth for the higher and lower stock prices and the earlier and later effective dates, as applicable, based on a 365- or 366-day year, as applicable;

 

   

if the applicable stock price is greater than $300.00 per share (subject to adjustment in the same manner and at the same time as the stock prices set forth in the column headings of the table above), then the fundamental change early settlement rate will be the minimum settlement rate; or