Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 7, 2017)
  • 10-Q (Aug 8, 2017)
  • 10-Q (May 8, 2017)
  • 10-Q (Nov 7, 2016)
  • 10-Q (Aug 8, 2016)
  • 10-Q (May 9, 2016)

 
8-K

 
Other

International Flavors & Fragrances 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. Ex-32
Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨

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  þ    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  þ    No    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
þ
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
¨
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    ¨ No  þ
Number of shares outstanding as of October 24, 2017: 78,977,158






PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(Unaudited)

 
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
316,002

 
$
323,992

Trade receivables (net of allowances of $14,258 and $9,995, respectively)
 
691,239

 
550,658

Inventories: Raw materials
 
303,296

 
288,629

Work in process
 
15,724

 
13,792

Finished goods
 
300,496

 
289,596

Total Inventories
 
619,516

 
592,017

Prepaid expenses and other current assets
 
222,990

 
142,347

Total Current Assets
 
1,849,747

 
1,609,014

Property, plant and equipment, at cost
 
2,073,149

 
1,913,333

Accumulated depreciation
 
(1,244,557
)
 
(1,137,617
)
 
 
828,592

 
775,716

Goodwill
 
1,153,619

 
1,000,123

Other intangible assets, net
 
424,138

 
365,783

Deferred income taxes
 
158,094

 
138,636

Other assets
 
106,248

 
127,712

Total Assets
 
$
4,520,438

 
$
4,016,984

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current Liabilities:
 
 
 
 
Bank borrowings and overdrafts and current portion of long-term debt
 
$
7,888

 
$
258,516

Commercial paper
 
39,957

 

Accounts payable
 
271,194

 
274,815

Accrued payroll and bonus
 
74,488

 
64,357

Dividends payable
 
54,440

 
50,678

Other current liabilities
 
248,160

 
249,931

Total Current Liabilities
 
696,127

 
898,297

Long-term debt
 
1,625,502

 
1,066,855

Deferred gains
 
37,975

 
39,816

Retirement liabilities
 
241,563

 
243,407

Other liabilities
 
156,783

 
137,475

Total Other Liabilities
 
2,061,823

 
1,487,553

Commitments and Contingencies (Note 13)
 

 

Shareholders’ Equity:
 
 
 
 
Common stock 12 1/2¢ par value; authorized 500,000,000 shares; issued 115,858,190 shares as of September 30, 2017 and December 31, 2016 and outstanding 78,977,158 and 79,213,037 shares as of September 30, 2017 and December 31, 2016
 
14,470

 
14,470

Capital in excess of par value
 
155,843

 
152,481

Retained earnings
 
3,965,133

 
3,818,535

Accumulated other comprehensive loss
 
(656,651
)
 
(680,095
)
Treasury stock, at cost - 36,881,032 shares as of September 30, 2017 and 36,645,153 shares as of December 31, 2016
 
(1,721,482
)
 
(1,679,147
)
Total Shareholders’ Equity
 
1,757,313

 
1,626,244

Noncontrolling interest
 
5,175

 
4,890

Total Shareholders’ Equity including noncontrolling interest
 
1,762,488

 
1,631,134

Total Liabilities and Shareholders’ Equity
 
$
4,520,438

 
$
4,016,984


See Notes to Consolidated Financial Statements

1



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,
 
2017
 
2016
 
2017
 
2016
Net sales
$
872,940

 
$
777,001

 
$
2,544,094

 
$
2,353,790

Cost of goods sold
490,884

 
430,733

 
1,422,783

 
1,281,673

Gross profit
382,056

 
346,268

 
1,121,311

 
1,072,117

Research and development expenses
70,932

 
64,415

 
210,963

 
191,052

Selling and administrative expenses
141,473

 
152,046

 
417,713

 
408,372

Amortization of acquisition-related intangibles
8,766

 
5,468

 
24,327

 
16,659

Restructuring and other charges, net
3,249

 

 
14,183

 

Gain on sales of fixed assets
(31
)
 
(87
)
 
(120
)
 
(2,998
)
Operating profit
157,667

 
124,426

 
454,245

 
459,032

Interest expense
19,221

 
13,111

 
49,584

 
40,649

Other (income) expense, net
(2,880
)
 
(2,075
)
 
(17,192
)
 
(1,954
)
Income before taxes
141,326

 
113,390

 
421,853

 
420,337

Taxes on income
31,065

 
23,613

 
86,033

 
95,223

Net income
110,261

 
89,777

 
335,820

 
325,114

Other comprehensive income (loss), after tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
19,719

 
(6,191
)
 
29,809

 
3,198

(Losses) gains on derivatives qualifying as hedges
(4,014
)
 
268

 
(17,533
)
 
(9,124
)
Pension and postretirement net liability
3,845

 
2,586

 
11,168

 
7,719

Other comprehensive income (loss)
19,550

 
(3,337
)
 
23,444

 
1,793

Total comprehensive income
$
129,811

 
$
86,440

 
$
359,264

 
$
326,907

 
 
 
 
 
 
 
 
Net income per share - basic
$
1.39

 
$
1.13

 
$
4.24

 
$
4.07

Net income per share - diluted
$
1.39

 
$
1.12

 
$
4.22

 
$
4.05

Average number of shares outstanding - basic
79,063

 
79,580

 
79,072

 
79,727

Average number of shares outstanding - diluted
79,362

 
79,935

 
79,353

 
80,067

Dividends declared per share
$
0.69

 
$
0.64

 
$
1.97

 
$
1.76

See Notes to Consolidated Financial Statements

2



INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
335,820

 
$
325,114

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
85,446

 
75,109

Deferred income taxes
 
(3,439
)
 
8,323

Gain on disposal of assets
 
(120
)
 
(2,998
)
Stock-based compensation
 
20,149

 
19,471

Pension contributions
 
(36,870
)
 
(44,356
)
Litigation settlement
 
(56,000
)
 

Foreign currency gain on liquidation of entity
 
(12,214
)
 

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Trade receivables
 
(94,945
)
 
(36,070
)
Inventories
 
6,211

 
(160
)
Accounts payable
 
(20,560
)
 
(29,523
)
Accruals for incentive compensation
 
2,907

 
3,012

Other current payables and accrued expenses
 
9,423

 
30,663

Other assets
 
3,824

 
(10,704
)
Other liabilities
 
(40,143
)
 
3,956

Net cash provided by operating activities
 
199,489

 
341,837

Cash flows from investing activities:
 
 
 
 
Cash paid for acquisitions, net of cash received
 
(191,304
)
 

Additions to property, plant and equipment
 
(77,318
)
 
(70,179
)
Proceeds from life insurance contracts
 
1,941

 
292

Maturity of net investment hedges
 
2,226

 
(12
)
Proceeds from disposal of assets
 
1,275

 
3,664

Net cash used in investing activities
 
(263,180
)
 
(66,235
)
Cash flows from financing activities:
 
 
 
 
Cash dividends paid to shareholders
 
(151,678
)
 
(134,051
)
Decrease in revolving credit facility borrowings and overdrafts
 
(3,952
)
 
(128,324
)
Increase in commercial paper
 
39,950

 

Deferred financing costs
 
(5,373
)
 
(4,780
)
Repayments of debt
 
(250,000
)
 
(125,000
)
Proceeds from issuance of long-term debt
 
498,250

 
555,559

Loss on pre-issuance hedges
 
(5,310
)
 
(3,244
)
Proceeds from issuance of stock under stock plans
 
329

 
594

Employee withholding taxes paid
 
(11,509
)
 
(13,315
)
Purchase of treasury stock
 
(53,211
)
 
(94,148
)
Net cash provided by financing activities
 
57,496

 
53,291

Effect of exchange rate changes on cash and cash equivalents
 
(1,795
)
 
(12,151
)
Net change in cash and cash equivalents
 
(7,990
)
 
316,742

Cash and cash equivalents at beginning of year
 
323,992

 
181,988

Cash and cash equivalents at end of period
 
$
316,002

 
$
498,730

Interest paid, net of amounts capitalized
 
$
38,634

 
$
45,008

Income taxes paid
 
$
77,356

 
$
80,050

See Notes to Consolidated Financial Statements

3



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 the related notes and management’s discussion and analysis of results of operations, liquidity and capital resources included in our 2016 Annual Report on Form 10-K (“2016 Form 10-K”). These interim statements are unaudited. The year-end balance sheet data included in this Form 10-Q 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 2017 and 2016 quarters, the actual closing dates were September 29, and September 30, 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 “IFF,” the “Company,” “we,” “us” and “our” mean International Flavors & Fragrances Inc. and its consolidated subsidiaries.
Reclassifications and Revisions
Certain prior year amounts have been reclassified and revised to conform with current year presentation.
The Consolidated Statement of Comprehensive Income has been revised to properly reflect Gain on sales of fixed assets within Operating profit for the three and nine months ending September 30, 2016. These amounts were previously included in Other (income) expense, net. In addition, approximately $5.4 million of expense was recorded during the first quarter of 2017 for a tax assessment relating to prior periods. The Consolidated Statement of Cash Flows has been revised to properly reclassify $5.4 million from Net cash used in financing activities to Net cash provided by operating activities for the nine months ended September 30, 2016. These adjustments were not material to the current and previously-issued financial statements.
Recent Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (“FASB”) issued amendments to the Derivatives and Hedging guidance which eliminates the requirement to separately measure and present hedge ineffectiveness and aligns the presentation of hedge gains and losses with the underlying hedge item. This guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The amended presentation and disclosure requirements should be applied prospectively while the amendments to cash flow and net investment hedge relationships should be applied on a modified retrospective basis. The Company is currently evaluating the impact this guidance will have on its Consolidated Financial Statements.
In May 2017, the FASB issued amendments to the Compensation - Stock Compensation guidance which clarifies changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting. This guidance is effective, and should be applied prospectively, for fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company does not expect this guidance to have an impact on its Consolidated Financial Statements as it is not the Company's practice to modify the terms or conditions of a share-based payment award after it has been granted.
In March 2017, the FASB issued amendments to the Compensation - Retirement Benefits guidance which requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and postretirement costs in operating expenses. This guidance is effective, and should be applied retrospectively, for fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period. The Company expects the impact that this guidance will have on its Consolidated Statement of Comprehensive Income will be an increase in operating expenses of approximately $15 million and $30 million for the fiscal years 2016 and 2017, respectively. There will be no impact to Net income in either period.
In January 2017, the FASB issued amendments to the Business Combination guidance which clarifies the definition of a business in order to assist companies when evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance will be effective prospectively for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and on accounting for future acquisitions.

4



In January 2017, the FASB issued an amendment to the Goodwill Impairment guidance which eliminates Step 2 from the goodwill impairment test. This guidance will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted and the Company has elected to early adopt this guidance and will apply it to its existing annual impairment review policy for fiscal year 2017. The Company does not expect this adoption to have an impact on its consolidated financial statements.
In October 2016, the FASB issued authoritative guidance which allows for the immediate recognition of current and deferred income tax impact on intra-entity asset transfers, excluding inventory. This guidance will be effective for fiscal years beginning after December 15, 2017. The Company adopted this guidance in the first quarter of fiscal year 2017 and accordingly, recorded a cumulative-effect adjustment to Retained earnings that reduced Other assets and adjusted Deferred income taxes by a net amount of approximately $33 million.
In August 2016, the FASB issued authoritative guidance which requires changes to the classification of certain activities within the statement of cash flows. This guidance will be effective for annual and interim periods beginning after December 15, 2017. Early adoption will be permitted for all entities. The Company does not expect this adoption to have a significant impact on its Consolidated Statement of Cash Flows.
In March 2016, the FASB issued authoritative guidance which requires changes to several aspects of the accounting for share-based payment transactions, including the treatment of income tax consequences, classification of awards as either equity or liabilities, and classification of certain items on the statement of cash flows. This guidance was effective for annual and interim periods beginning after December 15, 2016. The Company adopted this standard during the first quarter of 2017. The standard requires that employee taxes paid when an employer withholds shares be presented in the Consolidated Statement of Cash Flows as a financing activity instead of an operating activity. The Company adopted this change retrospectively. The adoption resulted in a $11.5 million and $13.3 million reclassification from Net cash provided by operating activities to Net cash provided by financing activities on the Consolidated Statement of Cash Flows as of September 30, 2017 and 2016, respectively. In addition, the standard requires that excess tax benefits presented in the Consolidated Statement of Cash Flows be classified as an operating activity instead of a financing activity. The Company adopted this change retrospectively. The adoption resulted in a $3.2 million and $4.5 million reclassification from Net cash provided by financing activities to Net cash provided by operating activities on the Consolidated Statement of Cash Flows as of September 30, 2017 and 2016, respectively.
The standard also requires all excess tax benefits/deficiencies be recognized as income tax expense/benefit in the Consolidated Statement of Comprehensive Income. This guidance has been applied prospectively. This change resulted in a $3.2 million benefit to income tax expense for the period ended September 30, 2017. The 2016 period included a $1.2 million benefit to equity, which has not been retrospectively adjusted. The full year 2016 benefit to equity was $5.3 million. Additionally, the standard allows the Company to make an entity-wide accounting policy election to either estimate the number of awards that are expected to be forfeited or account for forfeitures as they occur. The Company has elected to continue to account for forfeitures using an estimate of awards expected to be forfeited.
In February 2016, the FASB issued authoritative guidance which requires changes to the accounting for leases. The new guidance establishes a new lease accounting model, that requires entities to record assets and liabilities related to leases on the balance sheet for certain types of leases. The guidance will be effective for annual and interim periods beginning after December 15, 2018. Early adoption will be permitted for all entities. The Company expects the adoption of this guidance will result in significant increases to assets and liabilities on its Consolidated Balance Sheet and is still evaluating the impact on its Consolidated Statement of Comprehensive Income.
In May 2014, the FASB issued authoritative guidance that provides for a comprehensive model to be used in accounting for revenue arising from contracts with customers. Under this standard, revenue will be recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. This guidance is applicable to all entities and is effective for annual and interim periods beginning after December 15, 2017. Companies have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Consolidated Balance Sheet. The Company has determined that it will adopt this guidance using the modified retrospective approach. The Company is evaluating the impact of the new standard, including updates to the standard that were issued by the FASB. In particular, the Company has reviewed the nature of its larger customer relationships and is in the process of reviewing the nature of potential regional variations in all aspects of its customer base regardless of size. Based on the work performed to date, the Company expects to conduct further review and analysis of certain areas that may lead to changes in the manner in which the Company recognizes revenue, including the customized nature of the product, consignment arrangements, rebates, upfront costs, shipping terms and documentation other than formal contracts. As a result, the financial statement impact has not yet been determined. The Company continues to evaluate the potential impact of this standard on its consolidated financial statements and related disclosures.

5



Accounts Receivable
The Company sells certain accounts receivable on a non-recourse basis to unrelated financial institutions under “factoring” agreements that are sponsored, solely and individually, by certain customers. The Company accounts for these transactions as sales of receivables, removes the receivables sold from its financial statements, and records cash proceeds when received by the Company. The beneficial impact on cash provided by operations from participating in these programs increased approximately $12.1 million for the nine months ended September 30, 2017 compared to an increase of approximately $25.8 million for the nine months ended September 30, 2016. The cost of participating in these programs was immaterial to our results in all periods.
Currency Translation Adjustment Reclassification
During the first quarter of 2017, the Company recorded income of approximately $12.2 million related to a foreign currency exchange gain from the release of a currency translation adjustment upon the liquidation of a foreign entity in 2017. This amount was recorded to Other (income) expense, net.

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)
2017
 
2016
 
2017
 
2016
Basic
79,063

 
79,580

 
79,072

 
79,727

Assumed dilution under stock plans
299

 
355

 
281

 
340

Diluted
79,362

 
79,935

 
79,353

 
80,067

There were no stock options or stock-settled appreciation rights (“SSARs”) excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2017. An immaterial amount of SSARs were excluded from the 2016 period.
The Company has issued shares of purchased restricted common stock and purchased restricted common stock units (collectively “PRSUs”) which contain rights to nonforfeitable dividends while these shares are outstanding and thus are considered participating securities. Such securities are required to be included in the computation of basic and diluted earnings per share pursuant to the two-class method. The Company did not present the two-class method since the difference between basic and diluted net income per share for both unrestricted common shareholders and PRSU shareholders was less than $0.01 per share for each period presented, and the number of PRSUs outstanding as of September 30, 2017 and 2016 was immaterial. Net income allocated to such PRSUs was $0.2 million for both the three months ended September 30, 2017 and 2016 and was $0.7 million and $0.8 million for the nine months ended September 30, 2017 and 2016, respectively.
Note 3. Acquisitions:
2017 Activity
PowderPure
On April 7, 2017, the Company completed the acquisition of 100% of the outstanding shares of Columbia PhytoTechnology, LLC d/b/a PowderPure ("PowderPure"), a privately-held flavors company with facilities in North America. The acquisition was accounted for under the purchase method. PowderPure was acquired to expand expertise in, and product offerings of, clean label solutions within the Flavors business. The Company paid approximately $55 million including $0.3 million of cash acquired for this acquisition, which was funded from existing resources including use of its revolving credit facility. Additionally, the Company recorded an accrual of approximately $1.4 million representing the current estimate of additional contingent consideration payable to the former owners of PowderPure. (The maximum earnout payable is $10 million upon satisfaction of certain performance metrics). The purchase price exceeded the preliminary fair value of existing net assets by approximately $46.7 million. The excess was allocated principally to identifiable intangible assets including approximately $27.5 million to proprietary technology, approximately $4.5 million to trade name and approximately $0.8 million to customer relationships, and approximately $13.9 million of goodwill (which is deductible for tax purposes). Goodwill is the excess of the purchase price over the fair value of net assets acquired and represents the value the Company expects to achieve from its increased exposure to clean label products within the Company's existing Flavors business. The intangible assets are being amortized over the following estimated useful lives: proprietary technology, 14 years, trade name, 14 years, and customer relationships, 4 years. The purchase price allocation is preliminary pending the finalization of the values of

6



intangible assets, finalization of working capital and the finalization of estimated useful lives. The purchase price allocation is expected to be completed by the fourth quarter of 2017.
No pro forma financial information for 2017 and 2016 is presented as the acquisition was not material to the consolidated financial statements.
Fragrance Resources
On January 17, 2017, the Company completed the acquisition of 100% of the outstanding shares of Fragrance Resources, a privately-held fragrance company with facilities in Germany, North America, France, and China. The acquisition was accounted for under the purchase method. Fragrance Resources was acquired to strengthen the North American and German Fragrances business. The Company paid approximately Euro 142.0 million (approximately $150.5 million) including approximately Euro 13.7 million (approximately $14.5 million) of cash acquired for this acquisition, which was funded from existing resources including use of its revolving credit facility. The purchase price exceeded the preliminary fair value of existing net assets by approximately $122.1 million. The excess was allocated principally to identifiable intangible assets including approximately $59.6 million related to customer relationships, approximately $6.1 million related to proprietary technology and trade name, and approximately $79.4 million of goodwill (which is not deductible for tax purposes) and approximately $23.0 million of net deferred tax liability. Goodwill is the excess of the purchase price over the fair value of net assets acquired and represents synergies from the addition of Fragrance Resources to the Company's existing Fragrances business. The intangible assets are being amortized over the following estimated useful lives: trade name, 2 years, proprietary technology, 5 years and customer relationships, 12 - 16 years. The purchase price allocation is preliminary pending the finalization of the values of intangible assets, principally customer relationships, finalization of working capital calculations and the finalization of estimated useful lives. The purchase price allocation is expected to be completed by the fourth quarter of 2017.
No pro forma financial information for 2017 and 2016 is presented as the acquisition was not material to the consolidated financial statements.
2016 Activity
David Michael
On October 7, 2016, the Company completed the acquisition of 100% of the outstanding shares of David Michael & Company, Inc. ("David Michael"). The acquisition was accounted for under the purchase method. David Michael was acquired to strengthen the North American flavors business. The Company paid approximately $242.6 million (including $5.1 million of cash acquired) for this acquisition, which was funded from existing resources. The preliminary purchase price allocation was updated during the first quarter of 2017, resulting in a reduction in allocation of value to customer relationships. The related reduction in amortization expense was not material to the Consolidated Statement of Comprehensive Income. The purchase price allocation was finalized during the second quarter of 2017. Additionally, during the second quarter of 2017, the Company finalized the working capital adjustment and paid an additional $0.6 million. The purchase price exceeded the fair value of existing net assets by approximately $168.7 million. The excess was allocated principally to identifiable intangible assets including approximately $50.0 million related to customer relationships, approximately $8.4 million related to proprietary technology and trade name, and approximately $110.2 million of goodwill (which is deductible for tax purposes). Goodwill is the excess of the purchase price over the fair value of net assets acquired and represents synergies from the addition of David Michael to the Company's existing Flavors business. The intangible assets are being amortized over the following estimated useful lives: trade name, 2 years, proprietary technology, 5 years and customer relationships, 18 - 20 years.
No pro forma financial information for 2016 is presented as the impact of the acquisition was immaterial to the Consolidated Statement of Comprehensive Income.
Note 4. Restructuring and Other Charges, Net:

2017 Productivity Program

On February 15, 2017, the Company announced that it was adopting a multi-year productivity program designed to improve overall financial performance, provide flexibility to invest in growth opportunities and drive long-term value creation. In connection with this program, the Company expects to optimize its global footprint and simplify its organizational structures globally. In connection with this initiative, the Company expects to incur cumulative, pre-tax cash charges of between $30-$35 million, consisting primarily of $21-$22 million in personnel-related costs and an estimated $9-$13 million in facility-related costs, such as lease termination, and integration-related costs. In addition, the Company may incur up to $5 million of accelerated depreciation.

The Company recorded $16.5 million of charges related to personnel-related costs and lease termination costs through the third quarter of 2017, of which $3.2 million was recorded during the third quarter of 2017, with the remainder of the personnel-

7



related and other costs expected to be recognized by the end of 2018. The Company made payments of $10.0 million related to severance in 2017. The overall charges were split approximately evenly between Flavors and Fragrances. This initiative is expected to result in the reduction of approximately 370 members of the Company’s global workforce, including acquired entities, in various parts of the organization.
2015 Severance Charges
During 2015, the Company established a series of initiatives intended to streamline its management structure, simplify decision-making and accountability, better leverage and align its capabilities across the organization and improve efficiency of its global manufacturing and operations network. As a result, the Company recorded charges for severance and related costs pertaining to approximately 150 positions that were affected. During 2017, the Company made payments of $0.2 million related to severance and recorded a credit of $2.3 million related to the reversal of severance accruals that were determined to be no longer required. No further actions are expected in 2017 related to these 2015 initiatives.
Changes in employee-related restructuring liabilities during the nine months ended September 30, 2017, were as follows:
(DOLLARS IN THOUSANDS)
Employee-Related Costs
 
Other
 
Total
Balance at December 31, 2016
$
3,277

 
$

 
$
3,277

Additional charges (reversals), net
13,233

 
950

 
14,183

Non-cash charges

 
(950
)
 
(950
)
Payments
(10,267
)
 

 
(10,267
)
Balance at September 30, 2017
$
6,243

 
$

 
$
6,243

Note 5. Goodwill and Other Intangible Assets, Net:
Goodwill
Movements in goodwill during 2017 were as follows:
(DOLLARS IN THOUSANDS)
Goodwill
Balance at December 31, 2016
$
1,000,123

Acquisitions
93,223

Foreign exchange
21,784

Other
38,489

Balance at September 30, 2017
$
1,153,619

Other above principally represents the increase to Goodwill associated with the update of certain customer relationship assumptions in the final purchase price allocation of David Michael, as disclosed in Note 3.













8



Other Intangible Assets
Other intangible assets, net consist of the following amounts: 
 
September 30,
 
December 31,
(DOLLARS IN THOUSANDS)
2017
 
2016
Cost
 
 
 
Customer relationships
$
414,045

 
$
371,270

Trade names & patents
38,503

 
30,679

Technological know-how
153,410

 
119,544

Other
24,777

 
24,470

    Total carrying value
630,735

 
545,963

Accumulated Amortization
 
 
 
Customer relationships
(99,300
)
 
(82,555
)
Trade names & patents
(14,436
)
 
(12,198
)
Technological know-how
(73,289
)
 
(68,292
)
Other
(19,572
)
 
(17,135
)
    Total accumulated amortization
(206,597
)
 
(180,180
)
 
 
 
 
    Other intangible assets, net
$
424,138

 
$
365,783

 
Amortization
Amortization expense was $8.8 million and $5.5 million for the three months ended September 30, 2017 and 2016, respectively and $24.3 million and $16.7 million for the nine months ended September 30, 2017 and 2016, respectively. Annual amortization is expected to be $35.6 million for the full year 2017, $34.9 million for the year 2018, $33.3 million for the year 2019, $32.6 million for the year 2020, $27.9 million for the year 2021 and $25.5 million for the year 2022.
Note 6. Borrowings:
Debt consists of the following:
(DOLLARS IN THOUSANDS)
Rate
 
Maturities
 
September 30, 2017
 
December 31, 2016
Senior notes - 2007 (1)
6.55
%
 
2019-27
 
249,765

 
499,676

Senior notes - 2013 (1)
3.20
%
 
2023
 
298,594

 
297,986

Euro Senior notes - 2016 (1)
1.75
%
 
2024
 
582,514

 
512,764

Senior notes - 2017 (1)
4.38
%
 
2047
 
492,653

 

Commercial paper
1.191
%
 
2017
 
39,957

 

Bank overdrafts and other
 
 
 
 
9,807

 
13,599

Deferred realized gains on interest rate swaps
 
 
 
 
57

 
1,346

 
 
 
 
 
1,673,347

 
1,325,371

Less: Current portion of debt
 
 
 
 
(47,845
)
 
(258,516
)
 
 
 
 
 
$
1,625,502

 
$
1,066,855

(1) Amount is net of unamortized discount and debt issuance costs.
Senior Notes - 2017
On May 18, 2017, the Company issued $500.0 million face amount of 4.375% Senior Notes ("Senior Notes - 2017") due 2047 at a discount of $1.8 million. The Company received proceeds related to the issuance of these Senior Notes - 2017 of $493.9 million which was net of the $1.8 million discount and $4.4 million in underwriting fees (recorded as deferred financing costs). In addition, the Company incurred $0.9 million in legal and professional costs associated with the issuance and such costs were recorded as deferred financing costs. In connection with the debt issuance, the Company entered into pre-issuance hedging transactions that were settled upon issuance of the debt and resulted in a loss of approximately $5.3 million. The discount, deferred financing costs and pre-issuance hedge loss are being amortized as interest expense over the 30 year term of the debt. The Senior Notes - 2017 bear interest at a rate of 4.375% per annum, with interest payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2017. The Senior Notes - 2017 will mature on June 1, 2047.

9



Upon 30 days’ notice to holders of the Senior Notes - 2017, the Company may redeem the Senior Notes - 2017 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, as specified in the Indenture governing the Senior Notes - 2017. However, no make-whole premium will be paid for redemptions of the Senior Notes - 2017 on or after December 1, 2046. 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, or to enter into sale-leaseback transactions. 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 - 2017 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 - 2017 at a price equal to 101% of the principal amount of the Senior Notes - 2017, plus accrued and unpaid interest to the date of repurchase.
Senior Notes - 2007
During the third quarter of 2017, the Company made a payment of $250 million on the Senior Notes - 2007.
Commercial Paper
Commercial paper issued by the Company generally has terms of 90 days or less. As of September 30, 2017, there was $40.0 million of commercial paper outstanding, which had a weighted average effective interest rate of 1.19%. As of September 30, 2017, commercial paper maturities did not extend for more than 30 days. The revolving credit facility is used as a backstop for the Company's commercial paper program. No commercial paper was issued during the nine months ended September 30, 2016.
Note 7. Income Taxes:
Uncertain Tax Positions
At September 30, 2017, the Company had $18.9 million of unrecognized tax benefits recorded in Other liabilities and $6.9 million in Other current liabilities. If these unrecognized tax benefits were recognized, the effective tax rate would be affected.
At September 30, 2017, the Company had accrued interest and penalties of $1.7 million classified in Other liabilities and $0.7 million in Other current liabilities.
As of September 30, 2017, the Company’s aggregate provisions for uncertain tax positions, including interest and penalties, was $28.2 million associated with various tax positions asserted in various jurisdictions, none of which is individually material.
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. In addition, the Company has open tax years with various taxing jurisdictions that range primarily from 2007 to 2016. 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 Company also has other ongoing tax audits and legal proceedings that relate to indirect taxes, such as value-added taxes, sales and use taxes and property taxes, which are discussed in Note 13.
Effective Tax Rate
The effective tax rate for the three months ended September 30, 2017 was 22.0% compared with 20.8% for the three months ended September 30, 2016. The quarter-over-quarter increase was largely due to higher repatriation costs partially offset by the impact of the global supply chain hub and mix of earnings as compared to the prior year. The effective tax rate for the nine months ended September 30, 2017 was 20.4% compared with 22.7% for the nine months ended September 30, 2016. The period-over-period decrease was primarily due to certain non-taxable gains on foreign currency and the impact of adopting the new accounting guidance on the tax effect of stock compensation vesting, a more favorable mix of earnings and the impact of the global supply chain hub, offset by unfavorable repatriation costs as compared to the prior year.

10



Note 8. Stock Compensation Plans
The Company has various plans under which its officers, senior management, other key employees and directors may be granted equity-based awards. Equity awards outstanding under the plans include PRSUs, restricted stock units (RSUs), stock options, SSARs and Long-Term Incentive Plan awards; liability-based awards outstanding under the plans are cash-settled RSUs.
Stock-based compensation expense and related tax benefits were as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(DOLLARS IN THOUSANDS)
2017
 
2016
 
2017
 
2016
Equity-based awards
$
7,256

 
$
5,697

 
$
20,149

 
$
19,471

Liability-based awards
1,396

 
1,836

 
4,447

 
4,168

Total stock-based compensation expense
8,652

 
7,533

 
24,596

 
23,639

Less: tax benefit
(2,574
)
 
(2,174
)
 
(7,123
)
 
(6,963
)
Total stock-based compensation expense, after tax
$
6,078

 
$
5,359

 
$
17,473

 
$
16,676

Note 9. 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 other charges, net, Global expenses (as discussed below) and certain non-recurring items, Interest expense, Other income (expense), net and Taxes on income.
The Global expenses caption below represent 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)
2017
 
2016
 
2017
 
2016
Net sales:
 
 
 
 
 
 
 
Flavors
$
409,800

 
$
366,857

 
$
1,230,286

 
$
1,118,869

Fragrances
463,140

 
410,144

 
1,313,808

 
1,234,921

Consolidated
$
872,940

 
$
777,001

 
$
2,544,094

 
$
2,353,790

Segment profit:
 
 
 
 
 
 
 
Flavors
$
91,378

 
$
77,512

 
$
289,723

 
$
259,662

Fragrances
93,528

 
85,010

 
260,085

 
261,843

Global expenses
(17,598
)
 
(11,405
)
 
(47,193
)
 
(37,544
)
Restructuring and other charges, net (1)
(3,249
)
 
(190
)
 
(14,183
)
 
(473
)
Acquisition-related costs (2)
(5,436
)
 
(786
)
 
(20,502
)
 
(2,035
)
Operational improvement initiative costs (3)
(407
)
 
(802
)
 
(1,473
)
 
(1,901
)
Legal (charges) credits (4)

 
(25,000
)
 
(1,000
)
 
(23,518
)
Gain on sales of assets (5)
31

 
87

 
120

 
2,998

Tax assessment (6)

 

 
(5,331
)
 

Integration-related costs (7)
(580
)
 

 
(2,501
)
 

FDA mandated product recall (8)

 

 
(3,500
)
 

Operating profit
157,667

 
124,426

 
454,245

 
459,032

Interest expense
(19,221
)
 
(13,111
)
 
(49,584
)
 
(40,649
)
Other income (expense)
2,880

 
2,075

 
17,192

 
1,954

Income before taxes
$
141,326

 
$
113,390

 
$
421,853

 
$
420,337

 

11



(1)
In 2017, charges represent severance costs related to the 2017 Productivity Program. In 2016, charges relate to accelerated depreciation which were recorded in Cost of goods sold.
(2)
Represents transaction costs related to the acquisitions of Fragrance Resources and PowderPure as well as the amortization of inventory "step-up" related to David Michael, Fragrance Resources and PowderPure in the 2017 period, and expense related to the amortization of inventory "step-up" and additional transaction costs related to the acquisition of Lucas Meyer in the 2016 period.
(3)
Represents accelerated depreciation in Hangzhou, China in both the 2017 and 2016 periods.
(4)
Represents additional charges related to litigation settlement in the 2017 period and reserve for litigation settlement in the 2016 period.
(5)
Represents gains on sale of assets in Latin America in the 2017 period and in Europe in the 2016 period.
(6)
Represents the reserve for a tax assessment related to commercial rent for prior periods.
(7)
Represents costs related to the integration of the David Michael and Fragrance Resources acquisitions.
(8)
Represents an estimate of the Company's incremental direct costs and customer reimbursement obligations, in excess of the Company's sales value of the recalled products, arising from an FDA mandated recall of consumer products as a result of raw material received and identified by the Company as containing contamination. (As discussed in Note 13, the sales value of the recalled products was reserved in the first quarter of 2017). While the Company does not believe that any of the affected raw material was included in its finished products delivered to the customer, as the delivered product included raw material of the same vendor lot that tested positive, the FDA, after being notified by the Company, initiated a recall of all consumer products including raw material from the affected vendor lot due to the potential for product contamination.
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, 2017 and 2016 were $251 million and $190 million, respectively and for the nine months ended September 30, 2017 and 2016 were $731 million and $555 million, respectively. Net sales attributed to all foreign countries in total for the three months ended September 30, 2017 and 2016 were $622 million and $587 million, respectively and for the nine months ended September 30, 2017 and 2016 were $1,813 million and $1,799 million, respectively. No country other than the U.S. had net sales in any period presented greater than 10% of total consolidated net sales.

Note 10. 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)
2017
 
2016
 
2017
 
2016
Service cost for benefits earned
$
698

 
$
771

 
$
2,093

 
$
2,314

Interest cost on projected benefit obligation
4,561

 
6,007

 
13,683

 
18,020

Expected return on plan assets
(9,246
)
 
(8,069
)
 
(27,737
)
 
(24,208
)
Net amortization and deferrals
1,793

 
1,387

 
5,377

 
4,159

Net periodic benefit (income) cost
(2,194
)
 
96

 
(6,584
)
 
285

Defined contribution and other retirement plans
1,939

 
1,211

 
6,718

 
5,823

Total (income) expense
$
(255
)
 
$
1,307

 
$
134

 
$
6,108

 
 
 
 
 
 
 
 
Non-U.S. Plans
Three Months Ended September 30,
 
Nine Months Ended September 30,
(DOLLARS IN THOUSANDS)
2017
 
2016
 
2017
 
2016
Service cost for benefits earned
$
5,956

 
$
3,863

 
$
17,867

 
$
11,443

Interest cost on projected benefit obligation
4,066

 
6,372

 
12,198

 
18,890

Expected return on plan assets
(12,873
)
 
(11,985
)
 
(38,618
)
 
(35,526
)
Net amortization and deferrals
4,185

 
3,286

 
12,554

 
9,738

Net periodic benefit cost
1,334

 
1,536

 
4,001

 
4,545

Defined contribution and other retirement plans
1,470

 
1,705

 
4,383

 
5,175

Total expense
$
2,804

 
$
3,241

 
$
8,384

 
$
9,720

The Company expects to contribute a total of approximately $3 - $10 million to its U.S. pension plans during 2017. During the nine months ended September 30, 2017, no contributions were made to the qualified U.S. pension plans, $33.6 million of contributions were made to the non-U.S. pension plans and $3.3 million of benefit payments were made with respect to the Company's non-qualified U.S. pension plan.

12




As of January 1, 2017, the Company changed its approach for calculating the discount rate which is applied to the Consolidated Balance Sheet and Consolidated Statement of Comprehensive Income from a single weighted-average discount rate approach to a multiple discount rate approach. The impact of this change for the full year 2017 is estimated to be a reduction of approximately $8 million in pension expense.
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)
2017
 
2016
 
2017
 
2016
Service cost for benefits earned
$
221

 
$
214

 
$
663

 
$
644

Interest cost on projected benefit obligation
588

 
787

 
1,764

 
2,360

Net amortization and deferrals
(1,046
)
 
(1,355
)
 
(3,138
)
 
(4,065
)
Total postretirement benefit income
$
(237
)
 
$
(354
)
 
$
(711
)
 
$
(1,061
)
The Company expects to contribute approximately $5 million to its postretirement benefits other than pension plans during 2017. In the nine months ended September 30, 2017, $3.1 million of contributions were made.

Note 11. 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.
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 14 of our 2016 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, 2017.

The amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at September 30, 2017 and December 31, 2016 consisted of the following: 

13



 
September 30, 2017
 
December 31, 2016
(DOLLARS IN THOUSANDS)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents (1)
$
316,002

 
$
316,002

 
$
323,992

 
$
323,992

Credit facilities and bank overdrafts (2)
9,807

 
9,807

 
13,599

 
13,599

Commercial paper (2)
39,957

 
39,957

 

 

Long-term debt: (3)
 
 
 
 
 
 
 
Senior notes - 2007
249,765

 
297,010

 
499,676

 
556,222

Senior notes - 2013
298,594

 
307,675

 
297,986

 
302,376

Euro Senior notes - 2016
582,514

 
614,498

 
512,764

 
546,006

Senior notes - 2017
492,653

 
497,998

 

 

 
(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, bank overdrafts and commercial paper 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
The Company periodically enters 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.

During the nine months ended September 30, 2017 and the year ended December 31, 2016, the Company entered into several 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 accumulated other comprehensive income ("AOCI") where they will remain until the net investments in our European subsidiaries are divested. The outstanding forward currency contracts have remaining maturities of approximately one year. Fourteen of these forward currency contracts matured during the nine months ended September 30, 2017.

Subsequent to the issuance of the Euro Senior Notes - 2016 during the first quarter of 2016, the Company designated the debt as a hedge of a portion of its net European investments. Accordingly, the change in the value of the debt that is attributable to foreign exchange movements is recorded in OCI as a component of Foreign currency translation adjustments in the accompanying Consolidated Statement of Comprehensive Income.

During the nine months ended September 30, 2017 and the year ended December 31, 2016, the Company 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 gains/(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.
The Company has entered into interest rate swap agreements that effectively converted 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, 2017.
During the first quarter of 2016, the Company entered into and terminated two Euro interest rate swap agreements to hedge the anticipated issuance of fixed-rate debt. These swaps were designated as cash flow hedges. The effective portions of

14



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. The Company incurred a loss of Euro 2.9 million ($3.2 million) due to the termination of these swaps. The loss is being amortized as interest expense over the life of the Euro Senior Notes - 2016.
During the fourth quarter of 2016 and the first quarter of 2017, the Company entered into interest rate swap agreements to hedge the anticipated issuance of fixed-rate debt, which are designated as cash flow hedges. The various hedge instruments were settled upon issuance of the debt on May 18, 2017 and resulted in a loss of approximately $5.3 million. As discussed in Note 6, the loss is being amortized as interest expense over the life of the Senior Notes - 2017.
The effective portions of cash flow hedges are recorded in OCI as a component of Losses/gains on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income.
The following table shows the notional amount of the Company’s derivative instruments outstanding as of September 30, 2017 and December 31, 2016: 
(DOLLARS IN THOUSANDS)
September 30, 2017
 
December 31, 2016
Foreign currency contracts
$
756,631

 
$
527,500

Interest rate swaps
150,000

 
412,500


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, 2017 and December 31, 2016: 
 
September 30, 2017
(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
$
1,171

 
$
14,335

 
$
15,506

 
$
1,171

 
$
14,335

 
$
15,506

Derivative liabilities (b)
 
 
 
 
 
Foreign currency contracts
$
9,942

 
$
2,016

 
$
11,958

Interest rate swaps
604

 

 
604

 
$
10,546

 
$
2,016

 
$
12,562

 
December 31, 2016
(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
$
13,765

 
$
7,737

 
$
21,502

Interest rate swaps
335

 

 
335

 
$
14,100

 
$
7,737

 
$
21,837

Derivative liabilities (b)
 
 
 
 
 
Foreign currency contracts
$
46

 
$
2,209

 
$
2,255

Interest rate swaps
725

 

 
725

 
$
771

 
$
2,209

 
$
2,980

 
(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, 2017 and 2016 (in thousands): 

15




Derivatives Not Designated as Hedging Instruments
Amount of Gain (Loss)
Recognized in Income on
Derivative
 
Location of Gain (Loss)
Recognized in Income
on Derivative
 
Three Months Ended September 30,
 
 
 
2017
 
2016
 
 
Foreign currency contracts
$
4,024

 
$
(3,313
)
 
Other (income) expense, net
Derivatives Not Designated as Hedging Instruments
Amount of Gain (Loss)
Recognized in Income on
Derivative
 
Location of Gain (Loss)
Recognized in Income
on Derivative
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
 
Foreign currency contracts
$
(9,157
)
 
$
(6,860
)
 
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.
The following table shows the effect of the Company’s derivative instruments designated as cash flow and net investment hedging instruments, net of tax, in the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (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,
 
2017
 
2016
 
 
 
2017
 
2016
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
(4,229
)
 
$
98

 
Cost of goods sold
 
$
1,815

 
$
(544
)
Interest rate swaps (1)
216

 
171

 
Interest expense
 
(216
)
 
(171
)
Derivatives in Net Investment Hedging Relationships:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
(1,130
)
 
(224
)
 
N/A
 

 

Euro Senior notes - 2016
(11,861
)
 
(2,856
)
 
N/A
 

 

Total
$
(17,004
)
 
$
(2,811
)
 
 
 
$
1,599

 
$
(715
)
 
 
 
 
 
 
 
 
 
 
 
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,
 
2017
 
2016
 
 
 
2017
 
2016
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
(13,505
)
 
$
(6,293
)
 
Cost of goods sold
 
$
4,062

 
$
4,808

Interest rate swaps (1)
(4,027
)
 
(2,830
)
 
Interest expense
 
(573
)
 
(428
)
 
 
 
 
 
 
 
 
 
 
Derivatives in Net Investment Hedging Relationships:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
(4,258
)
 
(694
)
 
N/A
 

 

Euro Senior notes - 2016
(43,050
)
 
6,793

 
N/A
 

 

Total
$
(64,840
)
 
$
(3,024
)
 
 
 
$
3,489

 
$
4,380