Edgar Filing: INTERNATIONAL FLAVORS & FRAGRANCES INC

IFF 9.30.2013-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-4858

INTERNATIONAL FLAVORS &

FRAGRANCES INC.

(Exact name of registrant as specified in its charter)




New York		13-1432060
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

521 West 57th Street, New York, N.Y. 10019-2960

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (212) 765-5500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Number of shares outstanding as of October 22, 2013: 81,513,192



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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERNATIONAL FLAVORS & FRAGRANCES INC.

CONSOLIDATED BALANCE SHEET

(DOLLARS IN THOUSANDS)

(Unaudited)



	September 30, 2013			December 31, 2012
ASSETS
Current Assets:
Cash and cash equivalents	$	343,149		$	324,422
Trade receivables (net of allowances of $8,945 and $9,293, respectively)	553,884			499,443
Inventories: Raw materials	239,601			256,728
Work in process	9,796			7,804
Finished goods	271,310			276,126
Total Inventories	520,707			540,658
Deferred income taxes	60,736			65,763
Prepaid expenses and other current assets	155,391			142,401
Total Current Assets	1,633,867			1,572,687
Property, plant and equipment, at cost	1,579,546			1,532,317
Accumulated depreciation	(922,884		)	(877,676		)
	656,662			654,641
Goodwill	665,582			665,582
Other intangible assets, net	32,134			36,688
Deferred income taxes	160,932			157,074
Other assets	175,334			159,520
Total Assets	3,324,511			3,246,192
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Bank borrowings and overdrafts and current portion of long-term debt	144			150,071
Accounts payable	176,238			199,272
Accrued payroll and bonus	84,292			80,027
Dividends payable	31,877			—
Restructuring and other charges	2,460			3,149
Other current liabilities	214,565			197,359
Total Current Liabilities	509,576			629,878
Long-term debt	933,464			881,104
Deferred gains	42,135			44,674
Retirement liabilities	297,553			327,373
Other liabilities	102,253			110,608
Total Other Liabilities	1,375,405			1,363,759
Commitments and Contingencies (Note 12)
Shareholders’ Equity:
Common stock 12 1/2¢ par value; authorized 500,000,000 shares; issued 115,761,840 shares as of September 30, 2013 and December 31, 2012; and outstanding 81,594,725 and 81,626,874 shares as of September 30, 2013 and December 31, 2012	14,470			14,470
Capital in excess of par value	126,195			127,504
Retained earnings	3,045,829			2,841,166
Accumulated other comprehensive loss	(403,558		)	(403,625		)
Treasury stock, at cost - 34,167,115 shares as of September 30, 2013 and 34,134,966 shares as of December 31, 2012	(1,346,979		)	(1,330,707		)
Total Shareholders’ Equity	1,435,957			1,248,808
Noncontrolling interest	3,573			3,747
Total Shareholders’ Equity including noncontrolling interest	1,439,530			1,252,555
Total Liabilities and Shareholders’ Equity	$	3,324,511		$	3,246,192

See Notes to Consolidated Financial Statements



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INTERNATIONAL FLAVORS & FRAGRANCES INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(AMOUNT IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net sales	$	742,256		$	708,955		$	2,227,727		$	2,140,888
Cost of goods sold	416,852			407,431			1,256,977			1,252,422
Research and development expenses	65,654			57,658			189,428			171,467
Selling and administrative expenses	118,221			109,691			357,687			327,942
Restructuring and other charges, net	—			—			2,105			1,668
Interest expense	11,625			9,907			35,637			31,330
Other (income) expense, net	(4,080		)	2,424			(16,359		)	1,333
Income before taxes	133,984			121,844			402,252			354,726
Taxes on income	34,938			105,481			110,187			168,710
Net income	99,046			16,363			292,065			186,016
Other comprehensive income, after tax:
Foreign currency translation adjustments	5,707			26,228			(11,118		)	2,169
(Losses)/gains on derivatives qualifying as hedges	(1,859		)	(3,940		)	(4,161		)	(1,506		)
Pension and postretirement net liability	5,126			4,178			15,346			12,949
Other comprehensive income	8,974			26,466			67			13,612
Total comprehensive income	$	108,020		$	42,829		$	292,132		$	199,628
Net income per share - basic	$	1.21		$	0.20		$	3.57		$	2.28
Net income per share - diluted	$	1.20		$	0.20		$	3.54		$	2.26
Average number of shares outstanding - basic	81,437			81,246			81,349			81,241
Average number of shares outstanding - diluted	82,043			81,898			81,959			81,984
Dividends declared per share	$	0.39		$	0.34		$	1.07		$	0.96

See Notes to Consolidated Financial Statements



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INTERNATIONAL FLAVORS & FRAGRANCES INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(DOLLARS IN THOUSANDS)

(Unaudited)



	Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net income	$	292,065		$	186,016
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization	61,084			56,332
Deferred income taxes	(5,167		)	(13,830		)
Gain on disposal of assets	(18,859		)	(2,243		)
Stock-based compensation	18,919			15,363
Pension settlement/curtailment	—			874
Spanish tax charge	—			72,362
Payments pursuant to Spanish tax settlement	—			(105,503		)
Changes in assets and liabilities:
Trade receivables	(72,051		)	(66,364		)
Inventories	10,679			(3,751		)
Accounts payable	(11,581		)	(33,652		)
Accruals for incentive compensation	(1,298		)	14,927
Other current payables and accrued expenses	27,416			29,095
Other assets	(23,805		)	(25,414		)
Other liabilities	(20,086		)	13,366
Net cash provided by operating activities	257,316			137,578
Cash flows from investing activities:
Additions to property, plant and equipment	(86,448		)	(84,176		)
Purchase of life insurance contracts	—			(1,127		)
Proceeds from termination of life insurance contracts	793			5,327
Maturity of net investment hedges	626			1,960
Proceeds from disposal of assets	16,782			223
Net cash used in investing activities	(68,247		)	(77,793		)
Cash flows from financing activities:
Cash dividends paid to shareholders	(55,525		)	(75,458		)
Net change in revolving credit facility borrowings and overdrafts	(282,915		)	8,376
Deferred financing costs	(2,800		)	—
Repayments of long-term debt	(100,000		)	—
Proceeds from long-term debt	297,786			—
Proceeds from issuance of stock under stock plans	3,613			7,664
Excess tax benefits on stock-based payments	5,583			6,920
Purchase of treasury stock	(31,923		)	—
Net cash used in financing activities	(166,181		)	(52,498		)
Effect of exchange rate changes on cash and cash equivalents	(4,161		)	1,615
Net change in cash and cash equivalents	18,727			8,902
Cash and cash equivalents at beginning of year	324,422			88,279
Cash and cash equivalents at end of period	$	343,149		$	97,181
Interest paid, net of amounts capitalized	$	47,754		$	41,804
Income taxes paid ⁽¹⁾	$	105,636		$	163,767

⁽¹⁾ The 2012 amount includes $105.5 million pursuant to the Spanish tax settlement (see Note 6).

See Notes to Consolidated Financial Statements



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Notes to Consolidated Financial Statements

Note 1. Consolidated Financial Statements:

Basis of Presentation

These interim statements and related management’s discussion and analysis should be read in conjunction with the Consolidated Financial Statements and their related notes and management’s discussion and analysis of results of operations, liquidity and capital resources included in our 2012 Annual Report on Form 10-K (“2012 Form 10-K”). These interim statements are unaudited. The year-end balance sheet data included in this Form 10-Q filing was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. We have historically operated and continue to operate on a 52/53 week fiscal year ending on the Friday closest to the last day of the quarter. For ease of presentation, September 30 and December 31 are used consistently throughout this Form 10-Q and these interim financial statements and related notes to represent the period-end dates. For the 2013 and 2012 periods, the actual closing dates were September 27 and September 28, respectively. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. When used herein, the terms “the Registrant,” “IFF,” “the Company,” “we,” “us” and “our” mean International Flavors & Fragrances Inc. and its consolidated subsidiaries.

Revisions

For the nine months ended September 30, 2012, the Consolidated Statement of Cash Flows has been revised to properly classify proceeds from termination of life insurance contracts of $5.3 million from Changes in other assets within Net cash provided by operating activities to Net cash used in investing activities. The Consolidated Statement of Cash Flows for the nine months ended September 30, 2012 has also been revised to properly eliminate capitalized interest of $4.9 million from Interest paid, net of capitalized amounts. These revisions are not considered material to the previously issued financial statements.

The Consolidated Balance Sheet as of December 31, 2012, has been revised to properly reflect the funded status of one of our non-U.S. pension plans, and the related deferred tax asset, from non-current to current. Accordingly, Retirement liabilities and deferred income taxes (non-current) were decreased by $10.6 million and $3.5 million, respectively and Other current liabilities and deferred income taxes (current) were increased by $7.2 million and $0.1 million, respectively. These revisions are not considered material to the previously issued financial statements.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance related to reclassifications out of accumulated other comprehensive income (“AOCI”). Under the amendments in this update, an entity is required to report, in one place, information about reclassifications out of AOCI and to report changes in its AOCI balances. For significant items reclassified out of AOCI to net income in their entirety in the same reporting period, reporting is required about the effect of the reclassifications on the respective line items in the statement where net income or loss is presented. For items that are not reclassified to net income or loss in their entirety in the same reporting period, a cross reference to other disclosures currently required under GAAP is required in the notes to the entity’s consolidated financial statements. This guidance is effective prospectively for reporting periods beginning after December 15, 2012. During the first quarter of 2013, the Company adopted this guidance as disclosed in Note 11.

In March 2013, the FASB issued authoritative guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The guidance is effective prospectively for reporting periods beginning after December 15, 2013. We do not anticipate that this adoption will have a significant impact on our financial position, results of operations or cash flows.

In July, 2013 the FASB issued authoritative guidance related to the financial statement presentation of unrecognized tax benefits. This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose. In such situations, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred



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tax assets. The guidance is effective prospectively for reporting periods beginning after December 15, 2013. We do not anticipate that this adoption will have a significant impact on our financial position, results of operations or cash flows.

In July 2013, the FASB issued authoritative guidance that permits the Fed Funds Effective Swap Rate to be used as an additional U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to interest rates on direct Treasury obligations of the U.S. government ("UST") and the London InterBank Offered Rate ("LIBOR"). The update also allows the use of different benchmark rates for similar hedges. The guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The initial adoption of this ASU did not impact to the Company's financial position, results of operations or cash flows.

Note 2. Net Income Per Share:

Net income per share is based on the weighted average number of shares outstanding. A reconciliation of the shares used in the computation of basic and diluted net income per share is as follows:



	Three Months Ended September 30,		Nine Months Ended September 30,
(SHARES IN THOUSANDS)	2013	2012	2013	2012
Basic	81,437	81,246	81,349	81,241
Assumed dilution under stock plans	606	652	610	743
Diluted	82,043	81,898	81,959	81,984

Stock options and stock settled appreciation rights (“SSAR’s”) to purchase 132,200 shares in the aggregate were outstanding as of the three and nine months ended September 30, 2012, but are not included in the computation of diluted net income per share because to do so would have been anti-dilutive for the periods presented. There were no stock options or SSAR’s excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2013.

The Company has issued shares of purchased restricted common stock (“PRS”) which contain rights to nonforfeitable dividends while these shares are outstanding and thus are considered participating securities which are required to be included in the computation of basic and diluted earnings per share pursuant to the two-class method. The Company did not present the two-class method since the difference between basic and diluted net income per share for both unrestricted common shareholders and PRS shareholders was less than $0.01 per share for each period presented and the number of PRS outstanding as of September 30, 2013 and 2012 was immaterial (approximately 0.7% and 0.6% of the total number of common shares outstanding as of September 30, 2013 and 2012, respectively). Net income allocated to such PRS was $0.6 million and $0.1 million during the three months ended September 30, 2013 and 2012, respectively and $1.9 million and $1.2 million during the nine months ended September 30, 2013 and 2012, respectively.

Note 3. Restructuring and Other Charges, Net:

Fragrance Ingredients Rationalization

During the second quarter of 2013, the Company announced that it intends to close its fragrance ingredients manufacturing facility in Augusta, Georgia by July 2014 and plans to consolidate production into other Company facilities. In connection with this closure, the Company expects to incur charges of $16 - $21 million, consisting primarily of $10 - $12 million in accelerated depreciation of fixed assets, $3 - $4 million in personnel-related costs and $3 - $5 million in plant shutdown and other related costs. The Company recorded a total charge of $2.9 million during the second quarter of 2013, consisting of a $2.1 million pre-tax charge related to severance included in Restructuring and other charges, net and a $0.8 million non-cash charge related to accelerated depreciation included in Cost of goods sold. During the third quarter of 2013, the Company recorded an additional $2.2 million non-cash charge related to accelerated depreciation included in Cost of goods sold. The remainder of the estimated costs is expected to be recognized over the following four quarters. The Company expects that 43 positions will be eliminated as a result of these decisions. The Company estimates that approximately $6 - $9 million of the costs will result in future cash expenditures.

Strategic Initiative

In the fourth quarter of 2011, the Company recorded a $9.8 million charge to cover a strategic initiative which involved a reduction in workforce primarily related to a realignment of responsibilities in our Fragrances business unit. It also entailed the redeployment of creative resources in emerging markets and resulted in the elimination of 72 positions across our Fragrances, Flavors and corporate functions. The Company recorded an additional net charge of $1.7 million during 2012,



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which was principally attributable to adjustments based on the final separation terms with affected employees. There are no additional charges expected for this plan.

Changes in employee-related restructuring liabilities during the nine months ended September 30, 2013 related to these plans were as follows:



	Fragrance Ingredients Rationalization
(DOLLARS IN THOUSANDS)	Fragrance Ingredients Rationalization			Accelerated Depreciation			Strategic Initiative			Total
December 31, 2012	$	—		$	—		$	3,149		$	3,149
Additional charges, net	2,105			3,000			—			5,105
Non-cash charges	—			(3,000		)	—			(3,000		)
Payments and other costs	(28		)	—			(2,766		)	(2,794		)
September 30, 2013	$	2,077		$	—		$	383		$	2,460

Note 4. Other Intangible Assets, Net:

Other intangible assets, net consist of the following amounts:



	September 30,			December 31,
(DOLLARS IN THOUSANDS)	2013			2012
Gross carrying value (1)	$	165,406		$	165,406
Accumulated amortization	(133,272		)	(128,718		)
Total	$	32,134		$	36,688


(1)	Includes patents, trademarks and other intellectual property, valued at acquisition.

Amortization expense was $1.5 million, in each period for the three months ended September 30, 2013 and 2012 and amortization expense for the nine months ended September 30, 2013 and 2012 was $4.6 million, in each period. Annual amortization is expected to be $6.1 million for the year 2013, $4.7 million for the years 2014 through 2017 and $4.6 million for the year 2018.

Note 5. Borrowings:

Debt consists of the following:



(DOLLARS IN THOUSANDS)	Rate		Maturities	September 30, 2013			December 31, 2012
Senior notes - 2007	6.40	%	2017-27	$	500,000		$	500,000
Senior notes - 2006	6.10	%	2016	125,000			225,000
Senior notes - 2013	3.20	%	2023	299,736			—
Credit facility			2016	—			296,748
Bank overdrafts and other				1,295			399
Deferred realized gains on interest rate swaps				7,577			9,028
				933,608			1,031,175
Less: Current portion of long-term debt				(144		)	(150,071		)
				$	933,464		$	881,104

On April 4, 2013, the Company issued $300.0 million face amount of 3.20% Senior Notes (“Senior Notes - 2013”) due 2023 at a discount of $0.3 million. The Company received proceeds related to the issuance of these Senior Notes - 2013 of $297.8 million which was net of the $0.3 million discount and a $1.9 million underwriting discount (recorded as deferred financing costs). In addition, the Company incurred $0.9 million of other deferred financing costs in connection with the debt issuance. The discount and deferred financing costs are being amortized as interest expense over the term of the Senior Notes - 2013. The Senior Notes - 2013 bear interest at a rate of 3.20% per year, with interest payable on May 1 and November 1 of each year, commencing on November 1, 2013. The Senior Notes - 2013 mature on May 1, 2023. Upon 30 days’ notice to



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holders of the Senior Notes - 2013, the Company may redeem the Senior Notes - 2013 for cash in whole, at any time, or in part, from time to time, prior to maturity, at redemption prices that include accrued and unpaid interest and a make-whole premium. However, no make-whole premium will be paid for redemptions of the Senior Notes - 2013 on or after February 1, 2023. The Indenture provides for customary events of default and contains certain negative covenants that limit the ability of the Company and its subsidiaries to grant liens on assets, to enter into sale-leaseback transactions or to consolidate with or merge into any other entity or convey, transfer or lease all or substantially all of the Company’s properties and assets. In addition, subject to certain limitations, in the event of the occurrence of both (1) a change of control of the Company and (2) a downgrade of the Senior Notes - 2013 below investment grade rating by both Moody’s Investors Services, Inc. and Standard & Poor’s Ratings Services within a specified time period, the Company will be required to make an offer to repurchase the Senior Notes - 2013 at a price equal to 101% of the principal amount of the Senior Notes - 2013, plus accrued and unpaid interest to the date of repurchase.

On April 26, 2013, the Company repaid the full amount outstanding under the credit facility ($283.1 million).

On July 12, 2013, the Company made a payment of $100.0 million related to our Senior Unsecured Notes issued in 2006.

Note 6. Income Taxes:

At September 30, 2013, we had $25.3 million of unrecognized tax benefits recorded in Other liabilities and $4.9 million recorded in Other current liabilities. If these unrecognized tax benefits were recognized, the effective tax rate would be affected.

For the nine months ended September 30, 2013, the Company reduced its accrual for interest and penalties by $6.8 million, net, principally related to Spain, as discussed below. At September 30, 2013, the Company had accrued interest and penalties of $0.5 million classified in Other liabilities and $0.2 million classified in Other current liabilities.

The Company regularly repatriates a portion of current year earnings from select non–U.S. subsidiaries. No provision is made for additional taxes on undistributed earnings of subsidiary companies that are intended and planned to be indefinitely invested in such subsidiaries. We intend to, and have plans to, reinvest these earnings indefinitely in our foreign subsidiaries to fund local operations and/or capital projects.

The Company has ongoing income tax audits and legal proceedings which are at various stages of administrative or judicial review, of which the most significant items are discussed below. In addition, the Company has other ongoing tax audits and legal proceedings that relate to indirect taxes, such as value-added taxes, capital tax, sales and use taxes and property taxes, which are discussed in Note 12.

During the third quarter of 2012 the Company and the Spanish tax authorities entered into an overall settlement with respect to assessments imposed in connection with audits for the 2004-2010 fiscal years. In connection with this settlement, the Company paid Euro 84.0 million ($105.5 million based on exchange rates at the respective payment dates) during 2012 and paid the remainder of Euro 1.5 million ($1.9 million based on the exchange rate at the payment date) in the first quarter of 2013. This settlement did not address either the 2002-2003 fiscal years or the 2011 fiscal year. In connection with the overall settlement, the Company recorded after-tax charges of $72.4 million during the third quarter 2012, which included $56.0 million related to the tax settlement of the 2004-2010 period and the increased liabilities for uncertain tax positions of $16.4 million for years not settled. During the fourth quarter of 2012 the Company and the Spanish tax authorities also finalized a multi-year agreement that established the tax basis for the Company’s activities in Spain for 2012 through 2014 consistent with the key principles preliminarily agreed upon as part of the overall settlement. The Company’s Spanish subsidiaries have not yet received an assessment with respect to the 2011 fiscal year.

As a result of the audits of 2002-2003 fiscal years, the Spanish tax authorities imposed assessments aggregating Euro 22.4 million ($28.6 million), including aggregate estimated interest. The Company had previously appealed these assessments with the Appellate Court. On February 7, 2013, the Appellate Court upheld the Central Economic-Administrative Tribunal’s (“TEAC”) ruling with respect to the 2003 tax assessment and the related tax avoidance claims. We decided not to pursue the appeal process. Accordingly, during the second quarter of 2013, we paid Euro 17.7 million ($23.3 million based on the exchange rate at the payment date) and during the third quarter we paid the remaining balance of Euro 3.1 million ($4.0 million based on the exchange rate at the payment date) in connection with the 2003 tax assessment. As a result of these payments, the remaining aggregate assessment related to the 2002 fiscal year was Euro 1.8 million ($2.4 million) as of September 30, 2013. To proceed with its appeals of the tax assessments for the 2002-2003 fiscal years, the Company was required to post bank guarantees. As of September 30, 2013, the Company had remaining posted bank guarantees of Euro 1.8 million ($2.4 million) associated with the 2002 appeal. In light of the court’s ruling, we also recorded a charge of $9.3 million in the first quarter associated with issues in the 2002-2003 cases that were unrelated to the issues underlying the 2004-2010 settlement. This charge was partially offset by a $3.1 million adjustment to prior accruals for the 2003 case. On June 17, 2013,



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the Appellate Court ruled against us on our appeal of the 2002 income tax assessment and related claims, which we have also decided not to appeal. There was no income tax impact associated with this decision.

In addition to the above, the Company has also been a party to four dividend withholding tax controversies in Spain in which the Spanish tax authorities alleged that the Company’s Spanish subsidiaries underpaid withholding taxes during the 1995-2001 fiscal years. The Company had previously appealed each of these controversies. During 2012, the Company received unfavorable decisions on the first three cases. As a result of these rulings, the Company (i) recorded charges (including estimated interest) of approximately $12.0 million after-tax during 2012, and (ii) made payments of Euro 9.8 million ($12.8 million based on exchange rate at the respective payment date) during 2012. At September 30, 2013, the Company had Euro 4.4 million ($6.0 million) reflected in income taxes payable in connection with these three cases. The fourth and final remaining appeal has not yet been heard by the Spanish Supreme Court. At September 30, 2013, the aggregate amount of the remaining dividend withholding controversy was Euro 3.2 million ($4.3 million), including estimated interest, which is fully reserved. As of September 30, 2013, the Company had posted bank guarantees of Euro 7.6 million ($10.3 million) in order to proceed with the appeal in this controversy.

As of September 30, 2013, the Company’s aggregate provisions for uncertain tax positions, including interest and penalties, was $30.9 million, which includes $7.2 million associated with the tax positions taken by our Spanish subsidiaries for the 2002 and the 2011 fiscal years, $3.7 million associated with our Spanish dividend withholding tax controversies and the remainder associated with various other tax positions asserted in foreign jurisdictions, none of which is individually material.

In addition, the Company has several other tax audits in process and has open tax years with various taxing jurisdictions that range primarily from 2007 to 2012. Based on currently available information, we do not believe the ultimate outcome of any of these tax audits and other tax positions related to open tax years, when finalized, will have a material impact on our financial position.

The effective tax rate for the three months ended September 30, 2013 was 26.1% compared with 86.6% for the three months ended September 30, 2012. The year-over-year reduction reflects the inclusion of a $72.4 million tax charge related to the Spanish tax settlement in the 2012 period as well as the restoration of the U.S. R&D tax credit in a Q3 2013 benefit and favorable mix of earnings that were partially offset by the reduction of deferred tax assets associated with a U.K. rate change.

The effective tax rate for the nine months ended September 30, 2013 was 27.4% compared with 47.6% for the nine months ended September 30, 2012. The 2013 first nine months includes a tax charge of $6.2 million related to the 2002-2003 cases (as discussed above) which was partially offset by a favorable mix of earnings and the reenactment of the U.S. R&D tax credit. The 2012 nine month period includes a $72.4 million tax charge in connection with the overall Spanish tax settlement as discussed above and a provision of $12.0 million related to the Spanish dividend withholding tax cases. These charges were partially offset by a $10.6 million benefit due to a corporate restructuring of certain of our foreign subsidiaries, a lower cost of remittances and other reserve adjustments on uncertain tax positions. The year-over-year reduction also reflects the 2012 and 2013 benefits associated with U.S. tax legislation enacted in the first quarter of 2013 (R&D tax credit), lower provisions for uncertain tax positions and favorable mix of earnings.

Note 7. Stock Compensation Plans:

The Company has various plans under which its officers, senior management, other key employees and directors may be granted equity-based awards. Equity awards outstanding under the plans include PRS, restricted stock units (“RSU’s”), stock options, SSAR’s and Long-Term Incentive Plan awards; liability-based awards outstanding under the plans are cash-settled RSUs.

Stock-based compensation expense and related tax benefits were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(DOLLARS IN THOUSANDS)	2013			2012			2013			2012
Equity-based awards	$	4,869		$	4,091		$	18,919		$	15,363
Liability-based awards	995			779			3,077			2,350
Total stock-based compensation expense	5,864			4,870			21,996			17,713
Less: tax benefit	(1,735		)	(1,511		)	(6,756		)	(5,546		)
Total stock-based compensation expense, after tax	$	4,129		$	3,359		$	15,240		$	12,167



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Note 8. Segment Information:

The Company is organized into two operating segments: Flavors and Fragrances. These segments align with the internal structure of the Company used to manage these businesses. Performance of these operating segments is evaluated based on segment profit which is defined as operating profit before Restructuring and certain non-recurring items, Interest expense, Other expense, net and Taxes on income.

The Global expenses caption below represents corporate and headquarters-related expenses which include legal, finance, human resources, certain incentive compensation expenses and other R&D and administrative expenses that are not allocated to individual operating segments.

Reportable segment information is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(DOLLARS IN THOUSANDS)	2013			2012			2013			2012
Net sales:
Flavors	$	349,385		$	340,674		$	1,079,786		$	1,051,932
Fragrances	392,871			368,281			1,147,941			1,088,956
Consolidated	$	742,256		$	708,955		$	2,227,727		$	2,140,888
Segment profit:
Flavors	$	81,101		$	76,145		$	254,055		$	236,458
Fragrances	81,309			65,331			221,577			185,049
Global expenses	(18,313		)	(7,301		)	(47,236		)	(32,450		)
Restructuring and other charges, net	—			—			(2,105		)	(1,668		)
Operational improvement initiative costs ⁽¹⁾	(2,568		)	—			(4,761		)	—
Operating profit	141,529			134,175			421,530			387,389
Interest expense	(11,625		)	(9,907		)	(35,637		)	(31,330		)
Other income, net ⁽²⁾	4,080			(2,424		)	16,359			(1,333		)
Income before taxes	$	133,984		$	121,844		$	402,252		$	354,726


(1)	Operational improvement initiative costs relate to the closing of a smaller facility in Europe and certain manufacturing activities in Asia, while transferring production to larger facilities in each respective region.


(2)	Other income, net includes a $16.1 million gain on the sale of a non-operating asset for the nine months ended September 30, 2013.

Net sales are attributed to individual regions based upon the destination of product delivery. Net sales related to the U.S. for the three months ended September 30, 2013 and 2012 were $171 million in each respective period and for the nine months ended September 30, 2013 and 2012 were $504 million and $506 million, respectively. Net sales attributed to all foreign countries in total for the three months ended September 30, 2013 and 2012 were $571 million and $538 million, respectively and for the nine months ended September 30, 2013 and 2012 were $1,724 million and $1,635 million, respectively. No non-U.S. country had net sales in any period presented greater than 8% of total consolidated net sales.



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Note 9. Employee Benefits:

Pension and other defined contribution retirement plan expenses included the following components:



U.S. Plans	Three Months Ended September 30,						Nine Months Ended September 30,
(DOLLARS IN THOUSANDS)	2013			2012			2013			2012
Service cost for benefits earned	$	881		$	938		$	2,643		$	2,815
Interest cost on projected benefit obligation	5,740			6,002			17,222			18,005
Expected return on plan assets	(6,557		)	(6,041		)	(19,671		)	(18,124		)
Net amortization and deferrals	5,868			4,913			17,606			14,738
Net periodic benefit cost	5,932			5,812			17,800			17,434
Defined contribution and other retirement plans	1,585			1,651			5,531			5,515
Total expense	$	7,517		$	7,463		$	23,331		$	22,949
Non-U.S. Plans	Three Months Ended September 30,						Nine Months Ended September 30,
(DOLLARS IN THOUSANDS)	2013			2012			2013			2012
Service cost for benefits earned	$	4,086		$	3,064		$	12,256		$	9,422
Interest cost on projected benefit obligation	7,718			7,560			23,204			23,144
Expected return on plan assets	(11,859		)	(9,813		)	(35,653		)	(32,701		)
Net amortization and deferrals	2,315			1,589			6,967			4,810
Loss due to settlements and special terminations	35			—			110			874
Net periodic benefit cost	2,295			2,400			6,884			5,549
Defined contribution and other retirement plans	1,548			1,150			2,838			3,479
Total expense	$	3,843		$	3,550		$	9,722		$	9,028

The Company expects to contribute $18 – $28 million to its non-U.S. pension plans during 2013. In the nine months ended September 30, 2013, $30.0 million of contributions were made to the qualified U.S. pension plans. In the three and nine months ended September 30, 2013, $4.3 million and $12.8 million of contributions were made to the non-U.S. plans, respectively. In the three and nine months ended September 30, 2013, $1.0 million and $3.1 million of benefit payments were made with respect to the Company’s non-qualified U.S. pension plan, respectively.

Expense recognized for postretirement benefits other than pensions included the following components:



	Three Months Ended September 30,						Nine Months Ended September 30,
(DOLLARS IN THOUSANDS)	2013			2012			2013			2012
Service cost for benefits earned	$	362		$	341		$	1,086		$	1,023
Interest cost on projected benefit obligation	1,168			1,447			3,504			4,341
Net amortization and deferrals	(663		)	(361		)	(1,989		)	(1,083		)
Total postretirement benefit expense	$	867		$	1,427		$	2,601		$	4,281

The Company expects to contribute approximately $5 million to its postretirement benefits other than pension plans during 2013. In the three and nine months ended September 30, 2013, $1.2 million and $3.9 million of contributions were made, respectively.

Note 10. Financial Instruments:

Fair Value

Accounting guidance on fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:


•	Level 1–Quoted prices for identical instruments in active markets.



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•	Level 2–Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.


•	Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. We determine the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) using the LIBOR swap curve and forward interest and exchange rates at period end. Such instruments are classified as Level 2 based on the observability of significant inputs to the model. We do not have any instruments classified as Level 1 or Level 3, other than those included in pension asset trusts as discussed in Note 13 of our 2012 Form 10-K.

These valuations take into consideration our credit risk and our counterparties’ credit risk. The estimated change in the fair value of these instruments due to such changes in our own credit risk (or instrument-specific credit risk) was immaterial as of September 30, 2013.

The amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at September 30, 2013 and December 31, 2012 consisted of the following:



	September 30, 2013				December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
(DOLLARS IN THOUSANDS)
Cash and cash equivalents ⁽¹⁾	$	343,149	$	343,149	$	324,422	$	324,422
Credit facilities and bank overdrafts ⁽²⁾	144		144		297,147		297,147
Long-term debt: ⁽³⁾
Senior notes - 2007	500,000		597,687		500,000		634,000
Senior notes - 2006	125,000		140,676		225,000		248,000
Senior notes - 2013	299,736		283,458		—		—


(1)	The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those instruments.


(2)	The carrying amount of our credit facilities and bank overdrafts approximates fair value as the interest rate is reset frequently based on current market rates as well as the short maturity of those instruments.


(3)	The fair value of our long-term debt was calculated using discounted cash flows applying current interest rates and current credit spreads based on our own credit risk.

Derivatives

We periodically enter into foreign currency forward contracts with the objective of reducing exposure to cash flow volatility associated with our intercompany loans, foreign currency receivables and payables, and anticipated purchases of certain raw materials used in operations. These contracts generally involve the exchange of one currency for a second currency at a future date, have maturities not exceeding twelve months and are with counterparties which are major international financial institutions.

In 2003, we executed a 10-year Yen - U.S. dollar currency swap related to the monthly sale and purchase of products between the U.S. and Japan which had been designated as a cash flow hedge. This swap matured in January 2013.

During the nine months ended September 30, 2013 and the year ended December 31, 2012, we entered into multiple forward currency contracts which qualified as net investment hedges, in order to mitigate a portion of our net European investments from foreign currency risk. The effective portions of net investment hedges are recorded in Other comprehensive income (“OCI”) as a component of Foreign currency translation adjustments in the accompanying Consolidated Statement of Comprehensive Income. Realized gains/(losses) are deferred in AOCI where they will remain until the net investments in our European subsidiaries are divested. Four of these forward currency contracts matured during the nine months ended September 30, 2013. The outstanding forward currency contracts have remaining maturities of approximately one year.



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During the nine months ended September 30, 2013 and the year ended December 31, 2012, we entered into several forward currency contracts which qualified as cash flow hedges. The objective of these hedges is to protect against the currency risk associated with forecasted U.S. dollar (USD) denominated raw material purchases made by Euro (EUR) functional currency entities which result from changes in the EUR/USD exchange rate. The effective portions of cash flow hedges are recorded in OCI as a component of Losses on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income. Realized gains/(losses) in AOCI related to cash flow hedges of raw material purchases are recognized as a component of Cost of goods sold in the accompanying Consolidated Statement of Comprehensive Income in the same period as the related costs are recognized.

During Q1 2013, we entered into three interest rate swaps to hedge the anticipated issuance of fixed-rate debt, which are designated as cash flow hedges. The effective portions of cash flow hedges are recorded in OCI as a component of Losses on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income. During the second quarter of 2013, we terminated these swaps and incurred a loss of $2.7 million, which we will amortize as Interest expense over the life of the Senior Notes - 2013 (discussed in Note 5).

During Q3 2013, we entered into multiple interest rate swap agreements effectively converting the fixed rate on a portion of our long-term borrowings to a variable short-term rate based on the LIBOR plus an interest markup. These swaps are designated as fair value hedges. Amounts recognized in Interest expense were immaterial for the three and nine months ended September 30, 2013. In addition, two interest rate swaps designated as fair value hedges matured in July 2013.

The following table shows the notional amount of the Company’s derivative instruments outstanding as of September 30, 2013 and December 31, 2012:



(DOLLARS IN THOUSANDS)	September 30, 2013		December 31, 2012
Foreign currency contracts	$	267,100	$	143,483
Interest rate swaps	$	375,000	$	100,000

The following tables show the Company’s derivative instruments measured at fair value (Level 2 of the fair value hierarchy), as reflected in the Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012:



	September 30, 2013
(DOLLARS IN THOUSANDS)	Fair Value of Derivatives Designated as Hedging Instruments		Fair Value of Derivatives Not Designated as Hedging Instruments		Total Fair Value
Derivative assets ^(a)
Foreign currency contracts	$	493	$	3,688	$	4,181
Interest rate swaps	1,151		—		1,151
	$	1,644	$	3,688	$	5,332
Derivative liabilities ^(b)
Foreign currency contracts	$	4,582	$	4,095	$	8,677



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	December 31, 2012
(DOLLARS IN THOUSANDS)	Fair Value of Derivatives Designated as Hedging Instruments		Fair Value of Derivatives Not Designated as Hedging Instruments		Total Fair Value
Derivative assets ^(a)
Foreign currency contracts	$	676	$	2,535	$	3,211
Interest rate swaps	328		—		328
	$	1,004	$	2,535	$	3,539
Derivative liabilities ^(b)
Foreign currency contracts	$	5,251	$	278	$	5,529


(a)	Derivative assets are recorded to Prepaid expenses and other current assets in the Consolidated Balance Sheet.


(b)	Derivative liabilities are recorded as Other current liabilities in the Consolidated Balance Sheet.

The following table shows the effect of the Company’s derivative instruments which were not designated as hedging instruments in the Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012 (in thousands):



Derivatives Not Designated as Hedging Instruments	Amount of (Loss) Gain						Location of (Loss) Gain Recognized in Income on Derivative
	Three Months Ended September 30,
	2013			2012
Foreign currency contracts	$	(4,821	)	$	(1,073	)	Other (income) expense, net
Derivatives Not Designated as Hedging Instruments	Amount of (Loss) Gain Recognized in Income on Derivative						Location of (Loss) Gain Recognized in Income on Derivative
	Nine Months Ended September 30,
	2013			2012
Foreign currency contracts	$	7,686		$	5,010		Other (income) expense, net

Most of these net gains (losses) offset any recognized gains (losses) arising from the revaluation of the related intercompany loans during the same respective periods.



	14

The following table shows the effect of the Company’s derivative instruments designated as cash flow and net investment hedging instruments in the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012 (in thousands):



	Amount of (Loss) Gain Recognized in OCI on Derivative (Effective Portion)						Location of (Loss) Gain Reclassified from AOCI into Income (Effective Portion)	Amount of (Loss) Gain Reclassified from Accumulated OCI into Income (Effective Portion)
	Three Months Ended September 30,							Three Months Ended September 30,
	2013			2012				2013			2012
Derivatives in Cash Flow Hedging Relationships:
Cross currency swap ⁽¹⁾	$	—		$	404		Other (income) expense, net	$	—		$	(719	)
Foreign currency contracts	(1,926		)	(4,351		)	Cost of goods sold	(1,172		)	1,720
Interest rate swaps ⁽²⁾	69			—			Interest expense	(69		)	—
Derivatives in Net Investment Hedging Relationships:
Foreign currency contracts	(2,295		)	(381		)	N/A	—			—
Total	$	(4,152	)	$	(4,328	)		$	(1,241	)	$	1,001

	Amount of (Loss) Gain Recognized in OCI on Derivative (Effective Portion)						Location of (Loss) Gain Reclassified from AOCI into Income (Effective Portion)	Amount of (Loss) Gain Reclassified from Accumulated OCI into Income (Effective Portion)
	Nine Months Ended September 30,							Nine Months Ended September 30,
	2013			2012				2013			2012
Derivatives in Cash Flow Hedging Relationships:
Cross currency swap ⁽¹⁾	$	—		$	1,437		Other (income) expense, net	$	(333	)	$	(2,093	)
Foreign currency contracts	(1,606		)	(3,028		)	Cost of goods sold	390			2,680
Interest rate swaps ⁽²⁾	(2,598		)	—			Interest expense	(137		)	—
Derivatives in Net Investment Hedging Relationships:
Foreign currency contracts	(653		)	(68		)	N/A	—			—
Total	$	(4,857	)	$	(1,659	)		$	(80	)	$	587


(1)	Ten year swap executed in 2003.


(2)	Interest rate swaps were entered into as pre-issuance hedges for the $300 million bond offering.

No ineffectiveness was experienced in the above noted cash flow hedges during the three and nine months ended September 30, 2013 and 2012. The ineffective portion of the net investment hedges was not material during the three and nine months ended September 30, 2013 and 2012.

The Company expects that approximately $1.8 million (net of tax) of derivative losses included in AOCI at September 30, 2013, based on current market rates, will be reclassified into earnings within the next 12 months. The majority of this amount will vary due to fluctuations in foreign currency exchange rates.



	15

Note 11. Accumulated Other Comprehensive Income (Loss):

The following tables present changes in the accumulated balances for each component of other comprehensive income, including current period other comprehensive income and reclassifications out of accumulated other comprehensive income:



	Foreign Currency Translation Adjustments			(Losses) Gains on Derivatives Qualifying as Hedges			Pension and Postretirement Liability Adjustment			Total
(DOLLARS IN THOUSANDS)
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2012	$	(93,722	)	$	(218	)	$	(309,685	)	$	(403,625	)
OCI before reclassifications	(11,118		)	(4,241		)	—			(15,359		)
Amounts reclassified from AOCI	—			80			15,346			15,426
Net current period other comprehensive income (loss)	(11,118		)	(4,161		)	15,346			67
Accumulated other comprehensive (loss) income, net of tax, as of September 30, 2013	$	(104,840	)	$	(4,379	)	$	(294,339	)	$	(403,558	)



	Foreign Currency Translation Adjustments			(Losses) Gains on Derivatives Qualifying as Hedges			Pension and Postretirement Liability Adjustment			Total
(DOLLARS IN THOUSANDS)
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2011	$	(111,409	)	$	4,237		$	(268,137	)	$	(375,309	)
OCI before reclassifications	2,169			(919		)	—			1,250
Amounts reclassified from AOCI	—			(587		)	12,949			12,362
Net current period other comprehensive income (loss)	2,169			(1,506		)	12,949			13,612
Accumulated other comprehensive (loss) income, net of tax, as of September 30, 2012	$	(109,240	)	$	2,731		$	(255,188	)	$	(361,697	)



	16

The following table provides details about reclassifications out of accumulated other comprehensive income to the Consolidated Statement of Comprehensive Income:



	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012			Affected Line Item in the Consolidated Statement of Comprehensive Income
(DOLLARS IN THOUSANDS)
(Losses) gains on derivatives qualifying as hedges
Cross currency swap	$	(333	)	$	(2,093	)	Other (income) expense, net
Foreign currency contracts	538			3,697			Cost of goods sold
Interest rate swaps	(137		)	—			Interest expense
	(148		)	(1,017		)	Provision for income taxes
	$	(80	)	$	587		Total, net of income taxes
(Losses) gains on pension and postretirement liability adjustments
Settlements / Curtailments	$	(110	)	$	(874	)	^(a)
Prior service cost	3,295			3,163			^(a)
Actuarial losses	(25,879		)	(21,628		)	^(a)
	7,348			6,390			Provision for income taxes
	$	(15,346	)	$	(12,949	)	Total, net of income taxes


(a)	The amortization of prior service cost and actuarial loss is included in the computation of net periodic benefit cost. Refer to Note 9 to the Consolidated Financial Statements - Employee Benefits for additional information regarding net periodic benefit cost.

Note 12. Commitments and Contingencies:

Guarantees and Letters of Credit

The Company has various bank guarantees and letters of credit which are available for use regarding governmental requirements associated with pending litigation in various jurisdictions and to support its ongoing business operations.

At September 30, 2013, we had total bank guarantees and standby letters of credit of approximately $57.9 million with various financial institutions. Of this amount, Euro 9.4 million ($12.7 million) in bank guarantees are related to governmental requirements on income tax disputes in Spain, as discussed in further detail in Note 6. Also included in the above aggregate amount is a total of $12.9 million in bank guarantees which the Company has posted to appeal a Spanish capital tax assessment and $23.3 million for certain assessments in Brazil for other diverse income tax and indirect tax disputes related to fiscal years 1998-2011. There were no material amounts utilized under the standby letters of credit as of September 30, 2013.

In order to challenge the assessments in these cases in Brazil, the Company has been required to and has separately pledged assets, principally property, plant and equipment, to cover assessments in the amount of approximately $18.2 million as of September 30, 2013.

Lines of Credit

The Company has various lines of credit which are available to support its ongoing business operations. At September 30, 2013, we had available lines of credit (in addition to the credit facility discussed in Note 5) of approximately $86.0 million with various financial institutions. There were no significant amounts drawn down pursuant to these lines of credit as of September 30, 2013.



	17

Litigation

The Company assesses contingencies related to litigation and/or other matters to determine the degree of probability and range of possible loss. A loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly sensitive and requires judgments about future events. On at least a quarterly basis, the Company reviews contingencies related to litigation to determine the adequacy of accruals. The amount of ultimate loss may differ from these estimates and further events may require the Company to increase or decrease the amounts it has accrued on any matter.

Periodically, we assess our insurance coverage for all known claims, where applicable, taking into account aggregate coverage by occurrence, limits of coverage, self-insured retentions and deductibles, historical claims experience and claims experience with our insurance carriers. The liabilities are recorded at management’s best estimate of the probable outcome of the lawsuits and claims, taking into consideration the facts and circumstances of the individual matters as well as past experience on similar matters. At each balance sheet date, the key issues that management assesses are whether it is probable that a loss as to asserted or unasserted claims has been incurred and if so, whether the amount of loss can be reasonably estimated. We record the expected liability with respect to claims in Other liabilities and expected recoveries from our insurance carriers in Other assets. We recognize a receivable when we believe that realization of the insurance receivable is probable under the terms of the insurance policies and our payment experience to date.

Environmental

Over the past 20 years, various federal and state authorities and private parties have claimed that we are a Potentially Responsible Party (“PRP”) as a generator of waste materials for alleged pollution at a number of waste sites operated by third parties located principally in New Jersey and have sought to recover costs incurred and to be incurred to clean up the sites.

We have been identified as a PRP at nine facilities operated by third parties at which investigation and/or remediation activities may be ongoing. We analyze our potential liability on at least a quarterly basis. We accrue for environmental liabilities when they are probable and estimable. We estimate our share of the total future cost for these sites to be less than $5 million.

While joint and several liability is authorized under federal and state environmental laws, we believe the amounts we have paid and anticipate paying in the future for clean-up costs and damages at all sites are not material and will not have a material adverse effect on our financial condition, results of operations or liquidity. This assessment is based upon, among other things, the involvement of other PRPs at most of the sites, the status of the proceedings, including various settlement agreements and consent decrees, and the extended time period over which payments will likely be made. There can be no assurance, however, that future events will not require us to materially increase the amounts we anticipate paying for clean-up costs and damages at these sites, and that such increased amounts will not have a material adverse effect on our financial condition, results of operations or cash flows.

Other Contingencies

The Company has contingencies involving third parties (such as labor, contract, technology or product-related claims or litigation) as well as government-related items in various jurisdictions in which we operate pertaining to such items as value-added taxes, other indirect taxes, customs and duties and sales and use taxes, the most significant government related contingencies exist in Brazil. It is possible that cash flows or results of operations, in any period, could be materially affected by the unfavorable resolution of one or more of these contingencies.

With regard to the Brazilian matters, we believe we have valid defenses for the underlying positions under dispute; however, in order to pursue these defenses, we are required to, and have provided, bank guarantees and pledged assets in the aggregate amount of $41.5 million. The Brazilian matters take an extended period of time to proceed through the judicial process and there are a limited number of rulings to date.

Based on the information available as of September 30, 2013, we estimate a range of reasonably possible loss related to the matters above of $2-$20 million.

In addition, the Spanish tax authorities are alleging claims for a capital tax in a case arising from similar allegations as the income tax cases (discussed in further detail in Note 6). In connection with the 2002 income tax assessment ruling discussed in Note 6, the Appellate Court rejected one of the two bases upon which we based our capital tax position. However, we believe that we still have a strong basis for our capital tax position and intend to continue to defend these claims. If there is an unfavorable ruling in this case, we estimate a reasonably possible loss of approximately $13 million.



	18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We create, manufacture and supply flavors and fragrances for the food, beverage, personal care and household-products industries either in the form of compounds or individual ingredients. Our flavors and fragrance compounds combine a large number of ingredients that are blended, mixed or reacted together to produce proprietary formulas created by our perfumers and flavorists.

Flavors are the key building blocks that impart taste in processed food and beverage products and, as such, play a significant role in determining consumer preference of the end products in which they are used. While we are a global leader, our flavors business is more regional in nature, with different formulas that reflect local tastes and ingredients. As a leading creator of flavors, we help our customers deliver on the promise of delicious and healthy foods and drinks that appeal to consumers. Our flavors compounds are ultimately used by our customers in four end-use categories: (1) Savory, (2) Beverages, (3) Sweet, pharmaceutical and oral care (“Sweet”), and (4) Dairy.

Our fragrances are a key component in the world’s finest perfumes and best-known consumer brands, including beauty care, fabric care, personal wash and home care products. Our fragrance compounds are ultimately used by our customers in two broad categories: (1) Fine Fragrance and Beauty Care and (2) Functional Fragrances, which when combined, we refer to as Fragrance Compounds. In addition, our Fragrance Ingredients are used internally and sold to third parties, including customers and competitors, for use in preparation of compounds.

The flavors and fragrances market is part of a larger market which supplies a variety of ingredients and components that consumer products companies utilize in their products. The broader market includes large multinational companies or smaller regional and local participants which supply products such as seasonings, texturizers, spices, enzymes, certain food-related commodities, fortified products and cosmetic ingredients. The flavors and fragrances market is estimated to be approximately $18 billion; however the exact size of the global market is not available due to fragmentation of data. We, together with the other top three companies, are estimated to comprise approximately two-thirds of the total estimated sales in the global flavors and fragrances sub-segment of the broader market.

As part of our strategic emphasis on profitable growth, since late 2011 we have exited certain low margin sales activities in Flavors and this process, which resulted in increased operating margins, which was substantially complete as of the end of the second quarter of 2013. In addition, in the second quarter of 2013, we announced our intention to close our fragrance ingredients manufacturing facility in Augusta, Georgia, thereby supporting our objective to ensure operations are cost efficient and competitive. We expect to close the facility by July 2014 and to consolidate production into other facilities, as further discussed in Note 3 to our Consolidated Financial Statements.

Net sales growth during the third quarter of 2013 was 5% on a reported basis. Excluding the effects of currency, local currency (LC) sales grew 4%. The LC growth reflects good new win performance (net of losses) in both Flavors and Fragrance Compounds as well as flat sales in Fragrance Ingredients. We expect that growth rates for the fourth quarter will be impacted by the very strong comparable results in 2012, particularly in fragrances. However, we are still on target to meet our long-term strategic targets. The negative impact on net sales growth from the exit of low margin sales activities was substantially complete as of the end of the second quarter 2013. We expect our emerging markets will continue to be the primary drivers of LC growth.

Exchange rate fluctuations had a 100 basis points (bps) favorable impact on net sales for the third quarter, driven mainly by a strengthening of the Euro versus the dollar versus the prior year quarter. The effect of exchange rates can vary by business and region, depending upon the mix of sales by destination country as well as the relative percentage of local sales priced in U.S. dollars versus local currencies.

Gross margins improved versus the third quarter of 2012. The improvement reflects modest declines in raw material costs, mix enhancements and internal improvements when compared to the third quarter of 2012. Gross margin also includes $2.4 million associated with a legal settlement gain received during the third quarter (as discussed below), which was largely offset by provisions for customer claims. Although we see modest declines in year-over-year raw material costs, the absolute raw material price levels remain near historical highs. Given the overall economic uncertainty and market volatility of our crop-related raw materials, it is challenging to predict their effects on gross margin trends. We intend to continue to pursue options to enable us to recover the double-digit cost increases that we have experienced during 2011-2012 and to improve our margins through operational performance and mix enhancement. We expect to continue to see year-over-year gross margin expansion in the near term given pricing actions taken in 2012, modest input cost declines in 2013 and other initiatives we have taken to improve margins, however, we expect the rate of year-over-year improvement to continue to moderate given the strong expansion realized in the first nine months of 2013. Included in the third quarter of 2013 is a $2.2 million non-cash charge



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related to accelerated depreciation included in Cost of goods sold associated with the Fragrance Ingredients Rationalization and a $0.4 million pre-tax charge associated with our operational improvement initiatives, which relate to the closing of a smaller facility in Europe and certain manufacturing activities in Asia while transferring production to larger facilities in each respective region. We have continued the testing and start-up process at our compounding facility in China and believe that commercial production will begin in the fourth quarter, which will result in higher depreciation expense and other potential operating costs associated with a commercial start-up.

FINANCIAL PERFORMANCE OVERVIEW

Reported sales in the third quarter of 2013 increased approximately 5%. In LC terms, sales increased 4% as a result of our broad and diverse portfolio of end-use product categories and geographies as the benefits associated with new win performance in both Flavors and Fragrance Compounds and lower volume declines on existing business in Fragrance Compounds as well as flat sales in Fragrance Ingredients. Flavors realized LC growth of 3% for the third quarter of 2013. Our Fragrance business achieved LC growth of 5%, consistent with LC sales in the third quarter of 2012. Fragrances performance reflects new win performance in our Fragrance Compounds categories, led by the Fabric and Home Care categories. Overall, our third quarter 2013 results continued to be driven by our strong emerging market presence that represented 48% of sales and experienced 8% LC growth. From a geographic perspective, the Latin America (LA), Europe, Africa and Middle East (EAME), and Greater Asia (GA) regions all delivered LC growth in 2013, led by LA and GA, with 8% LC growth in each region.

Operating profit increased $7.3 million to $141.5 million (19.1% of sales) in the 2013 third quarter compared to $134.2 million (18.9% of sales) in the comparable 2012 period. The three months ended September 30, 2013 included operational improvement initiative costs of $0.4 million related to closing a smaller facility in Europe and certain manufacturing activities in Asia while transferring production to larger facilities in each respective region and restructuring costs of $2.2 million related to the Fragrance Ingredients Rationalization. Excluding these charges, adjusted operating profit was $144.1 million (19.4% of sales) as of September 30, 2013. The quarter-over-quarter improvement also reflects a $3.6 million legal settlement gain received in the third quarter (allocated on a pro-rata basis between Cost of goods sold and Administrative expenses), which was substantially offset by provisions for customer claims and other losses. In addition, adjusted operating profit reflects volume growth combined with gross margin expansion (including the benefits of mix improvements, manufacturing efficiency and slightly favorable raw material costs) that collectively more than offset the effects of higher R&D, selling and administrative costs (including higher incentive compensation expense).

Net income increased by approximately $82.6 million quarter-over-quarter to $99.0 million as of September 30, 2013 principally driven by the absence of the Spanish tax charge of $72.4 million, which was recorded in the third quarter of 2012, as well as improved operating performance.

We continue to execute against our strategic priorities of leveraging our geographic reach, strengthening our innovation platform and maximizing our portfolio during the third quarter of 2013. By maintaining cost discipline and realizing productivity gains across many parts of the business, we believe that we can continue to fund investments in resources and capabilities in emerging markets, R&D and key technologies. In 2013, we believe that capital spending will approach 5% of sales as we continue to prioritize investments in emerging markets and Flavors.

Cash flows from operations for the nine months ended September 30, 2013 were $257.3 million or 11.6% of sales, compared to cash inflow from operations of $137.6 million or 6.4% of sales for the nine months ended September 30, 2012. The increase in cash flow from operations in 2013 primarily reflects the absence of payments pursuant to the Spanish tax settlement of $105.5 million which were included in the 2012 period, as well as higher earnings and improvements in core working capital (trade receivables, inventories and accounts payable).



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Results of Operations



	Three Months Ended September 30,								Nine Months Ended September 30,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)	2013			2012			Change		2013			2012			Change
Net sales	$	742,256		$	708,955		5	%	$	2,227,727		$	2,140,888		4	%
Cost of goods sold	416,852			407,431			2	%	1,256,977			1,252,422			—	%
Gross profit	325,404			301,524					970,750			888,466
Research and development (R&D) expenses	65,654			57,658			14	%	189,428			171,467			10	%
Selling and administrative (S&A) expenses	118,221			109,691			8	%	357,687			327,942			9	%
Restructuring and other charges, net	—			—			—	%	2,105			1,668			26	%
Operating profit	141,529			134,175					421,530			387,389
Interest expense	11,625			9,907			17	%	35,637			31,330			14	%
Other (income) expense, net	(4,080		)	2,424			(268	)%	(16,359		)	1,333			(1,327	)%
Income before taxes	133,984			121,844					402,252			354,726
Taxes on income	34,938			105,481			(67	)%	110,187			168,710			(35	)%
Net income	$	99,046		$	16,363		505	%	$	292,065		$	186,016		57	%
Diluted EPS	$	1.20		$	0.20		500	%	$	3.54		$	2.26		57	%
Gross margin	43.8		%	42.5		%	130.0		43.6		%	41.5		%	210.0
R&D as a percentage of sales	8.8		%	8.1		%	70.0		8.5		%	8.0		%	50.0
S&A as a percentage of sales	15.9		%	15.5		%	40.0		16.1		%	15.3		%	80.0
Operating margin	19.1		%	18.9		%	20.0		18.9		%	18.1		%	80.0
Adjusted operating margin ⁽¹⁾	19.4		%	18.9		%	50.0		19.2		%	18.2		%	100.0
Effective tax rate	26.1		%	86.6		%	(6,050.0	)	27.4		%	47.6		%	(2,020.0	)
Segment net sales
Flavors	$	349,385		$	340,674		3	%	$	1,079,786		$	1,051,932		3	%
Fragrances	392,871			368,281			7	%	1,147,941			1,088,956			5	%
Consolidated	$	742,256		$	708,955				$	2,227,727		$	2,140,888

(1)

Adjusted operating margin excludes the operational improvement initiative costs of $0.4 million and $1.8 million for the three and nine months ended September 30, 2013, respectively, Restructuring and other charges, net of $2.1 million and $1.7 million for the nine months ended September 30, 2013 and 2012, respectively, and $2.2 million and $3.0 million of accelerated depreciation included in Cost of goods sold related to the Fragrance Ingredients Rationalization for the three and nine months ended September 30, 2013.

Cost of goods sold includes the cost of materials and manufacturing expenses. R&D expenses relate to the development of new and improved products, technical product support and compliance with governmental regulations. S&A expenses include expenses necessary to support our commercial activities and administrative expenses supporting our overall operating activities.

THIRD QUARTER 2013 IN COMPARISON TO THIRD QUARTER 2012

Sales

Sales for the third quarter of 2013 totaled $742.3 million, an increase of 5% from the prior year quarter. Excluding the impact of foreign currency, LC sales increased 4%, as a result of new wins in both Flavors and Fragrance Compounds and combined with flat Fragrance Ingredients LC sales. Overall LC growth was driven by 8% growth in emerging markets.



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Flavors Business Unit

Flavors reported sales growth increased 2% and LC sales growth increased 3% during the third quarter of 2013 compared to the 2012 period. The overall increase was principally driven by new wins. On an end-use product category basis, LC growth was led by high single-digit growth in Beverage and mid single-digit gains in Savory. All categories benefited from new wins. The Flavors business delivered LC growth in EAME, LA, and GA, led by LA and GA, while sales remained flat in NOAM. Sales in LA were driven by high double-digit gains in Beverages and sales in GA were driven by mid single-digit gains in Savory and Sweet. Sales in EAME were driven by high single-digit gains in Beverages, double-digit gains in Sweet and mid single-digit gains in Savory.

Fragrances Business Unit

The Fragrances business experienced a 7% increase in reported sales and an 5% increase in LC sales for the third quarter of 2013, consistent with the third quarter of 2012. The overall increase was driven by new wins in our Fragrance Compounds categories as well as flat sales in Fragrance Ingredients. Our Fragrance Compounds categories saw LC sales grow 7% over the prior year period compared to flat sales growth in Fragrance Ingredients. Within Fragrance Compounds, sales were driven by double-digit growth in Fabric and Home Care categories and mid single-digit growth in Fine & Beauty Care.

Sales performance by Region and Category



		% Change in Sales-Third Quarter 2013 vs. Third Quarter 2012
		Fine & Beauty Care		Functional		Ingredients		Total Frag.		Flavors		Total
NOAM	Reported	-10	%	7	%	-2	%	-2	%	1	%	0	%
EAME	Reported	16	%	4	%	-1	%	8	%	5	%	7	%
	Local Currency ⁽¹⁾	10	%	0	%	-5	%	3	%	3	%	3	%
LA	Reported	7	%	10	%	-8	%	7	%	4	%	6	%
	Local Currency ⁽¹⁾	10	%	12	%	-9	%	9	%	7	%	8	%
GA	Reported	9	%	16	%	25	%	15	%	1	%	6	%
	Local Currency ⁽¹⁾	10	%	16	%	31	%	16	%	4	%	8	%
Total	Reported	6	%	9	%	1	%	7	%	2	%	5	%
	Local Currency ⁽¹⁾	5	%	8	%	0	%	5	%	3	%	4	%


(1)	Local currency sales growth is calculated by translating prior year sales at the exchange rates for the corresponding 2013 period.

•

NOAM Flavors sales increased 1% as a result of double-digit growth in Beverages and mid single-digit growth in Savory that was partially offset by double-digit declines in Dairy and mid single-digit declines in Sweet. NOAM Fragrance sales decreased 2% in the third quarter of 2013, principally due to high double-digit gains in Home Care, which were more than offset by double-digit declines in Fine Fragrance, double-digit declines in Personal Wash and mid single-digit declines in Fragrance Ingredients.


•	EAME Flavors LC sales growth of 3% was led by double-digit growth in Sweet, high single-digit growth in Beverage and mid single-digit growth in Savory. EAME Fragrance LC sales increased 3% overall, driven mainly by double-digit growth in Fine & Beauty Care as well as double-digit growth in Fabric Care.


•	LA Flavors LC sales were up 7% as new wins drove high double-digit gains in Beverages, which were partially offset by high single-digit declines in Sweet. LA Fragrances LC sales had double-digit growth within both Fine & Beauty Care and Functional Fragrance categories, reflecting strong new win performance, which was only partially offset by high single-digit declines in Fragrance Ingredients.

•

GA Flavors had 4% LC sales growth from mid single-digit growth in Savory, Sweet and Dairy, driven by new win performance. GA Fragrances LC sales growth of 16% was driven by double-digit growth in Functional Fragrance categories and high single-digit growth in Fine & Beauty Care, benefiting from strong win performance, in addition to high double-digit growth in Fragrance Ingredients, as a result of volume increases.



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Cost of Goods Sold

Cost of goods sold, as a percentage of sales, decreased 130 bps to 56.2% in the third quarter of 2013 compared to 57.5% in the third quarter of 2012. The improvement versus last year was mainly driven by favorable sales mix and other margin recovery efforts, including manufacturing efficiencies combined with modestly lower raw material costs on a year-over-year basis.

Research and Development (R&D) Expenses

Overall R&D expenses, as a percentage of sales, increased 70 bps to 8.8% in the third quarter of 2013 versus 8.1% in the third quarter of 2012. The increase in R&D expenses reflects higher incentive compensation expense, payments associated with a multi-year collaboration agreement with Amyris and continued investments in technology and innovation.

Selling and Administrative (S&A) Expenses

S&A expenses, as a percentage of sales, increased 40 bps to 15.9% in the third quarter of 2013 versus 15.5% in the third quarter of 2012. The increase in S&A expenses principally reflects higher incentive compensation expense.

Operating Results by Business Unit

We evaluate the performance of business units based on segment profit which is defined as operating profit before Restructuring and certain non-recurring items, net, Interest expense, Other expense, net and Taxes on income. See Note 8 to our Consolidated Financial Statements for the reconciliation to Income before taxes.



	Three Months Ended September 30,
(DOLLARS IN THOUSANDS)	2013			2012
Segment profit:
Flavors	$	81,101		$	76,145
Fragrances	81,309			65,331
Global	(18,313		)	(7,301		)
Restructuring and other charges, net	—			—
Operational improvement initiative costs	(2,568		)	—
Operating profit	$	141,529		$	134,175
Profit margin
Flavors	23.2		%	22.4		%
Fragrances	20.7		%	17.7		%
Consolidated	19.1		%	18.9		%

Flavors Segment Profit

Flavors segment profit totaled $81.1 million in the third quarter of 2013, or 23.2% as a percentage of sales, compared to $76.1 million, or 22.4% as a percentage of sales, in the comparable 2012 period. The improvement in segment profit and profit margin was driven primarily by new wins and expanded gross margins (reflecting favorable price versus input cost trends) that collectively more than offset the higher spending in overhead.

Fragrances Segment Profit

Fragrances segment profit totaled $81.3 million in the third quarter of 2013, or 20.7% as a percentage of sales, compared to $65.3 million, or 17.7% as a percentage of sales, in the comparable 2012 period. The improvement in segment profit and profit margin was due to favorable sales mix and ongoing cost discipline, along with other profit improvement efforts.

Global Expenses

Global expenses represent corporate and headquarters-related expenses which include legal, finance, human resources and R&D and other administrative expenses that are not allocated to an individual business unit. In the third quarter of 2013, Global expenses were $18.3 million compared to $7.3 million during the third quarter of 2012. The increase reflects higher incentive compensation expense and unfavorable impacts on our cash flow hedging program.



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Restructuring and Other Charges, Net

Restructuring and other charges, net in 2013 consist of separation costs for employees, including severance, outplacement and other benefit costs, relating to the Fragrance Ingredients Rationalization that started in the second quarter of 2013 related to the closing of the fragrance ingredients manufacturing facility in Augusta, Georgia. The Company recorded a non-cash charge of $2.2 million related to accelerated depreciation included in Cost of goods sold. The Company expects that 43 positions will be eliminated as a result of these decisions. The Company estimates that approximately $6-$9 million of the costs will result in future cash expenditures.

Interest Expense

Interest expense increased $1.7 million to $11.6 million in the third quarter of 2013 compared to the third quarter of 2012. The increase in interest expense principally reflects the additional borrowings from the Senior Notes - 2013 issuance that occurred during the second quarter of 2013. Average cost of debt was 4.7% for the 2013 three month period compared to 4.5% in the 2012 three month period.

Other (Income) Expense, Net

Other (income) expense, net increased by approximately $6.5 million to $4.1 million of income in the third quarter of 2013 versus $2.4 million of expense in the comparable 2012 period. The increase over the prior year period is driven largely by changes in realized and unrealized foreign exchange losses/gains on working capital.

Income Taxes

The effective tax rate for the three months ended September 30, 2013 was 26.1% compared with 86.6% for the three months ended September 30, 2012 (including a $72.4 million charge related to the Spanish tax settlement). Net of tax benefits related to restructuring and operational improvement initiative costs of $0.9 million, the adjusted effective tax rate for 2013 was 26.2% and excluding the $72.4 million Spanish tax charge, the adjusted tax rate for 2012 was 27.2%. The reduction in the adjusted rate year-over-year is driven by the restoration of the U.S. R&D tax credit resulting in a Q3 2013 benefit (of approximately 60 bps) and favorable mix of earnings that were partially offset by the reduction of deferred tax assets associated with a U.K. rate change.

FIRST NINE MONTHS OF 2013 IN COMPARISON TO FIRST NINE MONTHS OF 2012

Sales

Sales for the first nine months of 2013 totaled $2.2 billion, an increase of 4% from the prior year quarter. Excluding the impact of foreign currency, LC sales increased 5% (or 6% on a like-for-like basis, excluding the effects of the exit of low margin sales activities), as new wins in both Flavors and Fragrance Compounds collectively more than offset declines in Fragrance Ingredients principally related to high-volume products. Overall LC growth was driven by 9% growth in emerging markets.

Flavors Business Unit

Flavors sales increased 3% for the first nine months of 2013 compared to the 2012 period. Excluding the impact of foreign currency, LC sales for the Flavors business increased 4% during the first nine month of 2013 compared to the 2012 period. Excluding the impact of a 2% decline in sales associated with the strategic decision to exit certain lower margin sales activities, LC sales increased 6% on a like-for-like basis. The overall increase was driven by new wins and favorable sales mix. On an end-use product category basis, LC growth was led by double-digit growth in Beverages followed by mid single-digit growth in Savory and low single-digit growth in Dairy, which was partially offset by mid single-digit declines in Sweet, primarily as a result of the exit of low margin sales activities in NOAM. The Flavors business delivered LC growth in EAME, LA and GA, led by GA. Sales in GA were driven by high single-digit gains in Savory, double-digit gains in Dairy and mid single-digit gains in Sweet. Sales in EAME were driven by double-digit gains in Beverages and mid single-digit growth in Savory. LA LC growth of 4% was driven by double-digit gains in Beverages and mid single-digit growth in Savory. Sales in NOAM were led by high double-digit gains in Beverages that were more than offset by high double-digit declines in Sweet and high single-digit declines in Dairy.

Fragrances Business Unit

The Fragrances business experienced a 5% increase in both reported and LC sales for the first nine months of 2013 versus 1% growth in LC sales during the first nine months of 2012. New wins in Fragrance Compounds were partially offset by single-digit declines in Fragrance Ingredients. Our Fragrance Compounds categories saw LC sales grow 8% over the prior year



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period compared to 4% declines in Fragrance Ingredients principally related to high-volume products. The declines in Fragrance Ingredients were partially offset by improved volumes within the specialty segment. Within Fragrance Compounds, sales were driven by double-digit growth in Fabric Care and Hair Care categories and high single-digit growth in Fine Fragrance.

Sales performance by Region and Category



		% Change in Sales-First Nine Months 2013 vs. First-Nine Months 2012
		Fine & Beauty Care		Functional		Ingredients		Total Frag.		Flavors		Total
NOAM	Reported	-2	%	1	%	-4	%	-1	%	-1	%	-1	%
EAME	Reported	8	%	6	%	-5	%	4	%	5	%	4	%
	Local Currency ⁽¹⁾	6	%	4	%	-6	%	3	%	5	%	3	%
LA	Reported	12	%	12	%	-7	%	10	%	2	%	7	%
	Local Currency ⁽¹⁾	16	%	13	%	-7	%	13	%	4	%	10	%
GA	Reported	9	%	14	%	0	%	10	%	4	%	6	%
	Local Currency ⁽¹⁾	9	%	14	%	5	%	12	%	6	%	8	%
Total	Reported	7	%	8	%