SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 2006
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 (IRS Employer
incorporation or organization) 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 Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve 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 [|X|] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer[X] Accelerated filer[ ] Non-accelerated filer[ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Number of shares outstanding as of October 31, 2006: 89,688,025
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(Unaudited)
ASSETS 9/30/06 12/31/05
- ---------------------------------------------------------------------------------------- ------------- -------------
Current Assets:
Cash and cash equivalents $ 162,763 $ 272,545
Short-term investments 321 352
Trade receivables 387,359 319,644
Allowance for doubtful accounts (14,139) (14,821)
Inventories: Raw materials 200,978 197,268
Work in process 13,760 11,866
Finished goods 218,720 221,660
------------- -------------
Total Inventories 433,458 430,794
Deferred income taxes 69,175 75,366
Other current assets 95,292 107,394
------------- -------------
Total Current Assets 1,134,229 1,191,274
------------- -------------
Property, Plant and Equipment, at cost 1,032,260 1,025,707
Accumulated depreciation (552,792) (526,562)
------------- -------------
479,468 499,145
------------- -------------
Goodwill 665,582 665,582
Other Intangible Assets, net 95,937 107,069
Other Assets 206,738 175,126
------------- -------------
Total Assets $ 2,581,954 $ 2,638,196
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY 9/30/06 12/31/05
- ---------------------------------------------------------------------------------------- ------------- -------------
Current Liabilities:
Bank borrowings and current portion of long-term debt $ 302,663 $ 819,392
Accounts payable 104,717 98,588
Accrued payrolls and bonuses 38,244 23,260
Dividends payable 16,566 17,189
Income taxes 67,262 41,089
Restructuring and other charges 15,145 30,099
Other current liabilities 190,204 173,079
------------- -------------
Total Current Liabilities 734,801 1,202,696
------------- -------------
Other Liabilities:
Long-term borrowings 505,598 131,281
Deferred gains 65,442 67,713
Retirement liabilities 213,514 207,452
Other liabilities 103,487 113,707
------------- -------------
Total Other Liabilities 888,041 520,153
------------- -------------
Commitments and Contingencies (Note 10)
Shareholders' Equity:
Common stock 12 1/2(cent) par value; authorized 500,000,000 shares;
issued 115,761,840 shares 14,470 14,470
Restricted Stock (3,428) -
Capital in excess of par value 94,208 71,894
Retained earnings 1,880,381 1,752,055
Accumulated other comprehensive income:
Cumulative translation adjustment (22,965) (47,369)
Accumulated losses on derivatives qualifying as hedges (net of tax) (13,002) (2,606)
Minimum pension liability adjustment (net of tax) (100,380) (100,380)
------------- -------------
1,849,284 1,688,064
Treasury stock, at cost - 26,179,343 shares in 2006 and 23,047,349 shares in 2005 (890,172) (772,717)
------------- -------------
Total Shareholders' Equity 959,112 915,347
------------- -------------
Total Liabilities and Shareholders' Equity $ 2,581,954 $ 2,638,196
============= =============
See Notes to Consolidated Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
3 Months Ended 9/30 9 Months Ended 9/30
---------------------------------- -----------------------------------
2006 2005 2006 2005
---------------- --------------- ---------------- ----------------
Net sales $ 539,135 $ 493,118 $ 1,581,072 $ 1,531,748
---------------- --------------- ---------------- ----------------
Cost of goods sold 310,149 286,712 907,856 894,174
Research and development expenses 46,471 44,651 137,661 133,784
Selling and administrative expenses 88,092 86,022 261,364 253,632
Amortization of intangibles 3,713 3,768 11,134 11,303
Restructuring and other charges 316 - 673 -
Interest expense 6,475 6,566 18,148 18,204
Other (income) expense, net (6,783) (854) (6,630) (3,968)
---------------- --------------- ---------------- ----------------
448,433 426,865 1,330,206 1,307,129
---------------- --------------- ---------------- ----------------
Income before taxes on income 90,702 66,253 250,866 224,619
Taxes on income 27,056 (2,319) 72,348 46,791
---------------- --------------- ---------------- ----------------
Net income 63,646 68,572 178,518 177,828
Other comprehensive income:
Foreign currency translation adjustments 10,050 6,228 24,404 (49,271)
Accumulated gains (losses) on derivatives
qualifying as hedges (net of tax) 7,351 697 (10,396) 2,066
---------------- --------------- ---------------- ----------------
Comprehensive income $ 81,047 $ 75,497 $ 192,526 $ 130,623
================ =============== ================ ================
Net Income per share - basic $0.71 $0.73 $1.97 $1.89
Net Income per share - diluted $0.70 $0.72 $1.95 $1.87
Average number of shares outstanding - basic 90,053 93,380 90,786 93,860
Average number of shares outstanding - diluted 90,988 94,622 91,489 95,301
Dividends declared per share $0.185 $0.185 $0.555 $0.545
See Notes to Consolidated Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
9 Months Ended 9/30,
------------------------------
2006 2005
-------------- -------------
Cash flows from operating activities:
Net income $ 178,518 $ 177,828
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization 66,910 69,546
Deferred income taxes (8,904) (25,667)
Gain on disposal of assets (14,682) (2,005)
Changes in assets and liabilities:
Current receivables (59,694) (44,827)
Inventories 12,328 (1,769)
Current payables 34,439 4,576
Other assets, net (9,311) (50,282)
Other liabilities, net 38,265 14,194
-------------- -------------
Net cash provided by operations 237,869 141,594
-------------- -------------
Cash flows from investing activities:
Net change in short-term investments 25 35
Additions to property, plant and equipment (30,883) (61,284)
Proceeds from disposal of assets 14,888 756
-------------- -------------
Net cash used in investing activities (15,970) (60,493)
-------------- -------------
Cash flows from financing activities:
Cash dividends paid to shareholders (50,815) (50,493)
Net change in bank borrowings and overdrafts (36,804) 2,044
Net change in commercial paper outstanding - 39,235
Proceeds from long-term debt 375,000 -
Repayments of long-term debt (499,300) (11,653)
Proceeds from issuance of stock under equity compensation plans 40,494 21,897
Purchase of treasury stock (162,221) (83,613)
-------------- -------------
Net cash used in financing activities (333,646) (82,583)
-------------- -------------
Effect of exchange rate changes on cash and cash equivalents 1,965 (2,826)
-------------- -------------
Net change in cash and cash equivalents (109,782) (4,308)
Cash and cash equivalents at beginning of year 272,545 32,596
-------------- -------------
Cash and cash equivalents at end of period $ 162,763 $ 28,288
============== =============
Interest paid $ 27,271 $ 19,751
Income taxes paid $ 48,680 $ 41,012
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
- ------------------------------------------
These interim statements and management's related 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
and financial condition included in the Company's 2005 Annual Report on Form
10-K. These interim statements are unaudited. In the opinion of the Company's
management, all adjustments, including normal recurring accruals, necessary for
a fair presentation of the results for the interim periods have been made.
Note 1. New Accounting Pronouncements:
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 ("FAS No. 109"). FIN 48 clarifies the
application of FAS No. 109 to the accounting for income taxes by prescribing the
minimum threshold a tax position must meet before being recognized in the
financial statements. Under FIN 48, the financial statement effects of a tax
position are initially recognized when it is considered more likely than not,
based on its technical merits, that the position will be sustained upon
examination. A tax position that meets the more likely than not recognition
threshold is initially and subsequently measured as the largest amount of
benefit, determined on a cumulative probability basis that is more likely than
not to be realized upon ultimate settlement with the taxing authority. This
interpretation is effective for fiscal years beginning after December 15, 2006.
The Company is currently assessing the potential impact of this interpretation
on its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("FAS 154"). This Statement replaces Accounting Principles Board No.
20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes
in Interim Financial Statements, and changes the requirements for the accounting
for and reporting of a change in accounting principle. FAS 154 is effective for
fiscal years beginning after December 15, 2006.
In September 2006, the FASB issued SFAS No. 157 ("FAS 157"), Fair Value
Measurements. This Statement defines fair value, establishes a framework for
measuring fair value and expands disclosures regarding fair value measurements.
FAS 157 is effective for fiscal years beginning after December 15, 2007. The
Company is currently evaluating the potential impact of this standard.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132R ("FAS 158"). This Statement requires an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position, and to recognize changes in that funded status in the year in which
the changes occur through Other comprehensive income. This Statement also
requires an employer to measure the funded status of a plan at the date of its
year-end statement of financial position. FAS 158 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
potential impact of this standard.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"), which provides interpretive guidance on the
consideration of prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. SAB 108 allows a
one-time transitional cumulative effect adjustment to beginning retained
earnings as of January 1, 2006, for errors that were not previously deemed
material, but are material under the guidance in SAB 108. The Company does not
believe the adoption of SAB 108 will have a material impact on its Consolidated
Financial Statements.
Note 2. Net Income Per Share:
Net income per share is based on the weighted average number of shares
outstanding. A reconciliation of 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) 2006 2005 2006 2005
- ---------------------------------------- -------------------- -------------------- -------------------- --------------------
Basic 90,053 93,380 90,786 93,860
Assumed conversion under stock plans 935 1,242 703 1,441
Diluted 90,988 94,622 91,489 95,301
- ---------------------------------------- -------------------- -------------------- -------------------- --------------------
Stock options to purchase 1,357,000 and 1,416,000 shares were outstanding for
the third quarter and first nine months of 2006, respectively, and 798,000 and
723,000 for the third quarter and first nine months of 2005, respectively, were
excluded in the computation of diluted net income per share for the respective
periods as their impact was anti-dilutive.
Note 3. Restructuring and Other Charges:
As described in Note 2 to the Consolidated Financial Statements in the Company's
2005 Annual Report, the Company has undertaken a significant reorganization,
including management changes, consolidation of production facilities and related
actions.
The Company undertook a plan to eliminate approximately 300 positions in
manufacturing, selling, research and administration functions, principally in
its European and North American operating regions. The majority of affected
positions involve employee separation while the balance relates to open
positions that will not be filled. As a result of these actions, the Company
recognized pre-tax charges of $23.3 million in the fourth quarter of 2005 and
$0.7 million in the first nine months of 2006. The Company recorded
restructuring and other charges of $0.3 million in the third quarter of 2006.
Movements in the liabilities related to the restructuring charges, included in
Restructuring and other charges or Other liabilities, as appropriate, were (in
millions):
Asset-
Employee- Related
Related and Other Total
-------------- --------------- --------------
Balance December 31, 2005 $ 29.5 $ 4.9 $ 34.4
Additional charges 1.9 0.4 2.3
Cash and other costs (18.2) (2.8) (21.0)
-------------- -------------- -------------
Balance September 30, 2006 $ 13.2 $ 2.5 $ 15.7
============== ============= ==============
Consistent with the original plan, the balance of employee-related liabilities
is expected to be utilized by 2008 as obligations are satisfied; the
asset-related charges will be utilized in 2007 on final decommissioning and
disposal of the affected equipment.
Note 4. Goodwill and Other Intangible Assets, Net
Goodwill by operating segment at September 30, 2006 and December 31, 2005 is as
follows:
(Dollars in thousands) Amount
- ---------------------------------------------------------------------
North America $ 218,575
Europe 258,607
India 29,209
Latin America 49,046
Asia Pacific 110,145
-----------------
Total $ 665,582
=================
Trademark and other intangible assets consist of the following:
September 30, December 31,
(Dollars in thousands) 2006 2005
- ---------------------------------------------------- ---------------- -------------------
Gross carrying value $ 177,498 $ 177,498
Accumulated amortization 81,561 70,429
--------------- -------------------
Total $ 95,937 $ 107,069
=============== ===================
Amortization expense for the period ended September 30, 2006 was $11.1 million;
estimated annual amortization is $14.8 million in 2006, $13.5 million in 2007,
$6.8 million in 2008 and 2009, and $6.7 million in 2010 and 2011, and $51.7
million thereafter.
Note 5. Comprehensive Income:
Changes in the accumulated other comprehensive income component of shareholders'
equity were as follows:
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated
losses on Minimum
derivatives Pension
Translation qualifying as Obligation,
2006 (Dollars in thousands) adjustments hedges, net of tax net of tax Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2005 $ (47,369) $ (2,606) $ (100,380) $ (150,355)
Change 24,404 (10,396) - 14,008
----------------- -------------------------- ---------------------- ---------------------
Balance September 30, 2006 $ (22,965) $ (13,002) $ (100,380) $ (136,347)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated
gains(losses) Minimum
on derivatives Pension
Translation qualifying as Obligation,
2005 (Dollars in thousands) adjustments hedges, net of tax net of tax Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2004 $ 8,227 $ (5,694) $ (110,705) $ (108,172)
Change (49,271) 2,066 - (47,205)
----------------- -------------------------- ---------------------- ---------------------
Balance September 30, 2005 $ (41,044) $ (3,628) $ (110,705) $ (155,377)
- -------------------------------------------------------------------------------------------------------------------------------
Note 6. Borrowings:
Debt consists of the following:
(Dollars in thousands) Rate(s) Maturities September 30, 2006 December 31, 2005
- -------------------------------------------------- --------------- ------------ ----------------------- ----------------------
Bank borrowings and overdrafts $ 302,663 $ 314,622
Current portion of long-term debt 6.45% 2006 - 499,208
Current portion of deferred realized gains on
interest rate swaps - 5,562
----------------------- ----------------------
Total current debt 302,663 819,392
----------------------- ----------------------
Japanese Yen notes 2.45% 2008-11 129,001 128,945
Senior Unsecured Notes 5.89%-6.14% 2009-16 375,000 -
Other 2011 36 40
Deferred realized gains on interest rate swaps 1,561 2,296
----------------------- ----------------------
Total long-term debt 505,598 131,281
----------------------- ----------------------
Total debt $ 808,261 $ 950,673
======================= ======================
The 6.45% Notes included as current debt at December 31, 2005 matured on May 15,
2006. On July 12, 2006, the Company issued $375.0 million of Senior Unsecured
Notes ("Senior Notes") in four series: (i) $50.0 million in aggregate principal
amount of 5.89% Series A Senior Notes due July 12, 2009, (ii) $100.0 million in
aggregate principal amount of 5.96% Series B Notes due July 12, 2011, (iii)
$100.0 million in aggregate principal amount of 6.05% Series C Notes due July
12, 2013 and (iv) $125.0 million in aggregate principal amount of 6.14% Series D
Notes due July 12, 2016.
Note 7. Equity Compensation Plans:
The Company previously applied the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") and provided the pro forma disclosures required by FASB
Statement No 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Under
APB 25, no compensation expense for employee stock options was reflected in net
earnings.
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R)
"Share-Based Payment" ("FAS 123 (R)") using the modified prospective method,
which requires measurement of compensation cost of all stock-based awards at
fair value on the date of grant and recognition of compensation expense over the
service periods for awards expected to vest. Under this transition method, 2006
compensation cost includes the portion vesting in the period for (1) all
share-based payments granted prior to, but not vested, as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of FAS 123, and (2) all share-based payments granted subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance with
the provisions of FAS 123(R). The Company will recognize the cost of all
employee stock options on a straight-line attribution basis over their
respective vesting periods, net of estimated forfeitures. Results for prior
periods have not been restated.
The Company changed its valuation model used for estimating the fair value of
options granted after January 1, 2006, from a Black-Scholes option-pricing model
to a Binomial lattice-pricing model, in order to provide a better estimate of
fair value; the Binomial model is considered a more flexible method for valuing
employee stock options than the Black-Scholes model. The flexibility of the
simulated Binomial model stems from the ability to incorporate inputs that
change over time, such as volatility and interest rates, and to allow for actual
exercise behavior of option holders. The Company is using an average of implied
and historical volatility while the expected term assumption was determined
based on historical patterns.
The Company has various equity plans under which the Company's officers, senior
management, directors and other key employees may be granted options to purchase
the Company's common stock or other forms of equity-based awards. Prior to 2004,
stock options were the primary form of equity compensation. Beginning in 2004,
the Company granted Restricted Stock Units ("RSU's") as the principal element of
its equity compensation for all eligible U.S. - based employees and a majority
of eligible overseas employees. Vesting of the RSU's for the Company's officers
and senior management has been performance and time based, and for the remainder
of eligible employees, vesting is solely time based; the vesting period is
primarily three years from date of grant. For a small group employees, primarily
overseas, the Company continues to grant stock options.
In 2006, the Board of Directors approved a Long Term Incentive Choice program
(the "Program") for the Company's senior management under the Company's 2000
Stock Award and Incentive Plan ("2000 SAIP"). Under the Program, eligible
employees can choose from among three equity alternatives and will be granted
such equity awards up to certain dollar awards depending on the participant's
grade level. A participant may choose among (1) Purchase Restricted Stock
("PRS"), (2) Stock Settled Appreciation Rights ("SSAR's") or (3) RSU's. The
balance of employees who are not eligible under the Program receive RSU's or, as
noted above, options.
Purchase Restricted Stock
- -------------------------
PRS provides for the participant to purchase restricted shares of the Company
stock at 50% of the fair market value on the grant date of the award. The shares
vest on the third anniversary of the grant date, are subject to employment and
other specified conditions, and pay dividends if and when paid by the Company.
The Company issued 217,905 shares of PRS in 2006 for a purchase price of $3.9
million.
Stock Options and SSAR's
- ------------------------
Stock options generally become exercisable on the first anniversary of the grant
date and have a maximum term of ten years. SSAR's become exercisable on the
third anniversary of the grant date and have a maximum term of seven years. The
Company awarded stock options and SSAR's in 2006 of 204,000 and 352,650,
respectively.
Compensation cost and the related tax benefit for unvested stock option awards
issued prior to adoption of FAS 123(R) totaled $.5 million and $.3 million for
the third quarter 2006, respectively, and $2.4 million and $.9 million for the
nine-month period ended September 30, 2006, respectively.
The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of FAS
123 to measure stock-based compensation expense for outstanding option awards
for the quarter and nine-month periods ended September 30, 2005. Using the
Black-Scholes option valuation model, the estimated fair values of options
granted during 2005 were $10.57 per share.
Three Months Ended Nine Months Ended
(Dollars in thousands except per share amounts) September 30, 2005 September 30, 2005
- ---------------------------------------------------------------- ----------------------------- ---------------------------
Net income, as reported $68,572 $177,828
Deduct: Total stock-based employee compensation
expense determined under fair value method for all
stock option awards of related tax effects 1,997 5,794
----------------------------- ---------------------------
Pro-forma net income $66,575 $172,034
============================= ===========================
Net income per share:
Basic - as reported $0.73 $1.89
Basic - pro-forma $0.71 $1.83
Diluted - as reported $0.72 $1.87
Diluted - pro-forma $0.70 $1.81
Principal assumptions used in applying the Black-Scholes model in 2005 and the
binomial model in 2006 were:
2005 2006
----------- ----------
Risk-free interest rate 4.2% 5.0%
Expected life, in years 5 5
Expected volatility 26.9% 21.3%
Expected dividend yield 1.7% 2.1%
The Company utilizes historical information to estimate expected life and
forfeitures within the valuation model. The expected term of an option is based
on historical employee exercise behavior, vesting terms and a contractual life
of primarily ten years for options and seven years for SSAR's. The risk-free
rate for periods within the expected life of the award is based on the U.S.
Treasury yield curve in effect at the time of grant. Expected volatility is
based on an average of implied and historical volatility of the price of the
Company's common stock over the calculated expected life. The Company
anticipates paying cash dividends in the future and therefore uses an expected
dividend yield in the valuation model; the cash dividend in effect at the time
of grant was employed in this calculation. Adoption of FAS 123(R) did not change
the way that the Company has accounted for stock awards in prior periods.
Stock option and SSAR activity was as follows:
Weighted Average
Average Remaining Aggregate
Shares Subject to Exercise Contractual Intrinsic Value
Options/SSARs Price Term (in millions)
----------------------------------------------------------------------
Balance at January 1, 2006 6,698,428 $32.52
Granted 556,650 $35.51
Exercised (1,154,272) $30.36
Cancelled (234,445) $40.03
-----------------------------
Balance at September 30, 2006 5,866,361 $32.88 5.8 39.1
=============================
Exercisable at September 30, 2006 5,071,440 $32.31 5.2 36.7
=============================
The total intrinsic value of options exercised during the third quarter and
nine-month period ended September 30, 2006 was $2.7 million and $6.1 million,
respectively. The weighted average grant date fair value of options granted
during the three and nine months ended September 30, 2006 was $7.74 and $7.66,
respectively.
The Company stock option and SSAR activity for non-vested awards was as follows:
Weighted
Average
Shares Exercise Price
------------------------- ------------------
Non-vested at January 1, 2006 1,074,140 $33.05
Options/SSAR's granted 556,650
Options/SSAR's vested (752,046)
Options/SSAR's cancelled (83,823)
-------------------------
Non-vested at September 30, 2006 794,921 $36.50
=========================
As of September 30, 2006, there was $5.5 million of total unrecognized
compensation cost related to non-vested stock option and SSAR awards granted
under the equity incentive plans relating to future periods. The cost is
expected to be recognized over a weighted average period of 2.2 years. The total
fair value of shares vested during the three and nine months ended September 30,
2006 was $- and $6.2 million, respectively.
Restricted Stock and Units
- --------------------------
The Company may grant restricted shares and RSU's to eligible employees, giving
them, in most instances, all of the rights of stockholders, except that they may
not sell, assign, pledge or otherwise encumber such shares. Such restricted
shares and RSU's are subject to forfeiture if certain employment conditions are
not met. RSU's generally vest 100% at the end of three years; however, RSU's
granted to all officers and senior management have a performance restriction
which if not attained terminates the RSU's prior to vesting. The fair value of
the RSU's is equal to the market price of the Company's stock at date of grant
and is amortized to expense ratably over the vesting period. The Company
recorded compensation expense related to restricted stock and RSU's for the
three and nine-months ended September 30, 2006 and 2005, as follows:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------------- ---------------------------
(In millions) 2006 2005 2006 2005
- --------------------------------------------------- ------------ ------------ ------------- ------------
Restricted stock and RSU's $4.1 $2.7 $10.0 $7.4
============ ============ ============= ============
Restricted stock and RSU activity was as follows:
Weighted
Average Grant
Number of Date Fair Value
Shares Per Share
----------------- ------------------
Balance at January 1, 2006 909,385 $38.84
Granted 595,124
Vested (46,711)
Forfeited (125,790)
--------------- -------------------
Balance at September 30, 2006 1,332,008 $37.03
=============== ===================
The total value of RSU's which vested during the first quarter was $1.6 million.
The adoption of FAS 123(R) resulted in a cumulative effect gain of $0.5 million
which reflects the net cumulative impact of estimating future forfeitures in the
determination of periodic expense for unvested RSU awards, rather than recording
forfeitures only when they occur. The cumulative effect was recorded in
operating expenses and not as a cumulative effect of a change in accounting
principle because the amount was not material.
Note 8. Segment Information:
The Company manages its operations by major geographical region. Flavors and
fragrances have similar economic and operational characteristics including
research and development, the nature of the creative and production processes,
the type of customers, and the methods by which products are distributed.
Accounting policies used for segment reporting are identical to those described
in Note 1 of the Notes to the Consolidated Financial Statements included in the
Company's 2005 Annual Report.
The Company evaluates the performance of its geographic regions based on segment
profit which is income before taxes on income, excluding interest expense, other
income and expense and the effects of restructuring and other charges and
accounting changes. The Company is divided into five geographic regions for
management purposes: North America, Europe, India, Latin America and Asia
Pacific. The Global Expenses caption represents corporate and
headquarters-related expenses including legal, finance, human resource and other
administrative expenses not allocable to individual regions. Transfers between
geographic regions are accounted for at prices that approximate arm's-length
market prices. The Company's reportable segment information follows:
Three Months Ended September 30, 2006
----------------------------------------------------------------------------------------------------
North Latin Asia Global Elimina- Consolid-
(Dollars in thousands) America Europe India America Pacific Expenses tions ated
- ---------------------------- ----------- ---------- ---------- ------------- ---------- ----------- ----------- -----------
Sales to unaffiliated customers $165,950 $197,452 $13,249 $69,906 $ 92,578 $ - $539,135
Transfers between areas 16,040 48,169 186 140 13,982 (78,517) -
---------------------------------------------------------------------------------------------------
Total sales $181,990 $245,621 $13,435 $70,046 $106,560 $(78,517) $539,135
===================================================================================================
Segment profit $ 17,326 $ 56,977 $ 2,633 $ 9,844 $ 19,794 $(16,154) $ 290 $ 90,710
Restructuring and other charges (599) 359 (94) 27 (9) - - (316)
---------------------------------------------------------------------------------------------------
Operating profit $ 16,727 $ 57,336 $ 2,539 $ 9,871 $ 19,785 $(16,154) $ 290 $ 90,394
====================================================================================
Interest expense (6,475)
Other income (expense), net 6,783
-----------
Income before taxes on income $ 90,702
===========
Three Months Ended September 30, 2005
----------------------------------------------------------------------------------------------------
North Latin Asia Global Elimina- Consolid-
(Dollars in thousands) America Europe India America Pacific Expenses tions ated
- ---------------------------- ----------- ---------- ---------- ------------- ---------- ----------- ----------- -----------
Sales to unaffiliated customers $154,659 $178,636 $14,208 $61,577 $ 84,038 $ - $493,118
Transfers between areas 17,698 47,907 17 98 11,520 (77,240) -
---------------------------------------------------------------------------------------------------
Total sales $172,357 $226,543 $14,225 $61,675 $ 95,558 $(77,240) $493,118
===================================================================================================
Segment profit $ 11,708 $ 44,789 $ 3,302 $ 6,079 $ 16,551 $ (9,074) $ (1,390) $ 71,965
Restructuring and other charges - - - - - - - -
---------------------------------------------------------------------------------------------------
Operating profit $ 11,708 $ 44,789 $ 3,302 $ 6,079 $ 16,551 $ (9,074) $ (1,390) $ 71,965
====================================================================================
Interest expense (6,566)
Other income (expense), net 854
--------------
Income before taxes on income $ 66,253
==============
Nine Months Ended September 30, 2006
----------------------------------------------------------------------------------------------------
North Latin Asia Global Elimina- Consolid-
(Dollars in thousands) America Europe India America Pacific Expenses tions ated
- ---------------------------- ----------- ---------- ---------- ------------- ---------- ----------- ----------- -----------
Sales to unaffiliated customers $490,672 $587,342 $47,418 $199,835 $255,805 $ - $1,581,072
Transfers between areas 47,667 139,488 484 392 37,019 (225,050) -
---------------------------------------------------------------------------------------------------
Total sales $538,339 $726,830 $47,902 $200,227 $292,824 $(225,050) $1,581,072
===================================================================================================
Segment profit $ 48,233 $175,788 $11,279 $ 26,452 $ 47,334 $(45,585) $ (444) $ 263,057
Restructuring and other charges (1,320) 1,529 (457) 24 (449) - - (673)
---------------------------------------------------------------------------------------------------
Operating profit $ 46,913 $177,317 $10,822 $ 26,476 $ 46,885 $(45,585) $ (444) $ 262,384
====================================================================================
Interest expense (18,148)
Other income (expense), net 6,630
--------------
Income before taxes on income $250,866
==============
Nine Months Ended September 30, 2005
----------------------------------------------------------------------------------------------------
North Latin Asia Global Elimina- Consolid-
(Dollars in thousands) America Europe India America Pacific Expenses tions ated
- ---------------------------- ----------- ---------- ---------- ------------- ---------- ----------- ----------- -----------
Sales to unaffiliated customers $466,829 $589,276 $46,161 $182,317 $247,165 $ - $1,531,748
Transfers between areas 58,059 146,669 21 536 32,758 (238,043) -
---------------------------------------------------------------------------------------------------
Total sales $524,888 $735,945 $46,182 $182,853 $279,923 $(238,043) $1,531,748
===================================================================================================
Segment profit $ 42,557 $157,152 $11,319 $ 18,418 $ 45,444 $(33,485) $ (2,550) $ 238,855
Restructuring and other charges - - - - - - - -
---------------------------------------------------------------------------------------------------
Operating profit $ 42,557 $157,152 $11,319 $ 18,418 $ 45,444 $(33,485) $ (2,550) $ 238,855
====================================================================================
Interest expense (18,204)
Other income (expense), net 3,968
---------------
Income before taxes on income $ 224,619
===============
9. Retirement Benefits:
As described in Note 14 of the Notes to the Consolidated Financial Statements
included in the Company's 2005 Annual Report, the Company and most of its
subsidiaries have pension and/or other retirement benefit plans covering
substantially all employees. For the third quarter and nine months ended
September 30, 2006 and 2005, pension expense for the U.S. and non - U.S. plans
included the following components:
U.S. Plans Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(Dollars in thousands) 2006 2005 2006 2005
- --------------------------------------------------------- --------------- ------------- ------------- -------------
Service cost for benefits earned $ 2,336 $ 2,301 $ 7,608 $ 7,081
Interest cost on projected benefit obligation 5,394 5,410 16,324 15,810
Expected return on plan assets (5,467) (5,461) (16,453) (15,947)
Net amortization and deferrals 1,705 1,489 5,735 3,871
--------------- ------------- ------------- -------------
Defined benefit plans 3,968 3,739 13,214 10,815
Defined contribution and other retirement plans 703 708 2,248 2,212
--------------- ------------- ------------- -------------
Total pension expense $ 4,671 $ 4,447 $ 15,462 $ 13,027
=============== ============= ============= =============
Non - U.S. Plans Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(Dollars in thousands) 2006 2005 2006 2005
- --------------------------------------------------------- --------------- ------------- ------------- -------------
Service cost for benefits earned $ 3,356 $ 2,651 $ 9,734 $ 7,976
Interest cost on projected benefit obligation 8,015 7,431 22,029 22,293
Expected return on plan assets (10,768) (8,418) (29,686) (25,256)
Net amortization and deferrals 2,448 2,191 6,654 6,571
--------------- ------------- ------------- -------------
Defined benefit plans 3,051 3,855 8,731 11,584
Defined contribution and other retirement plans 837 802 2,452 2,446
--------------- ------------- ------------- -------------
Total pension expense $ 3,888 $ 4,657 $ 11,183 $ 14,030
=============== ============= ============= =============
The Company expects to contribute $15 million to its qualified U.S. pension
plans in 2006. Contributions of $0.5 million were made to these plans in the
first nine months of 2006. In the quarter and nine months ended September 30,
2006, $0.7 million and $2.1 million of benefit payments were made, respectively,
with respect to the non-qualified plan. The Company expects to contribute $19
million to its non-U.S. pension plans in 2006. In the quarter and nine months
ended September 30, 2006, $3.1 million and $9.0 million of contributions were
made, respectively, to these plans.
For the quarter and nine month periods ended September 30, 2006 and 2005,
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) 2006 2005 2006 2005
- ---------------------------------- ------------------ ------------------- ------------------ -------------------
Service cost for benefits earned $ 598 $ 900 $ 2,310 $ 2,144
Interest on benefit obligation 1,169 1,791 4,319 4,243
Net amortization and deferrals (245) 491 137 277
------------------ ------------------- ------------------ -------------------
Total postretirement benefit expense $ 1,522 $ 3,182 $ 6,766 $ 6,664
================== =================== ================== ===================
The Company expects to contribute $3.9 million to its postretirement benefit
plans in 2006. In the quarter and nine months ended September 30, 2006, $1.3
million and $3.5 million of contributions were made, respectively.
Note 10. Commitments and Contingencies:
The Company is party to a number of lawsuits and claims related primarily to
flavoring supplied by the Company to manufacturers of butter flavor popcorn. At
each balance sheet date, or more frequently as conditions warrant, the Company
reviews the status of each pending claim, as well as its insurance coverage for
such claims with due consideration given to potentially applicable deductibles,
retentions and reservation of rights under its insurance policies, and the
advice of its outside legal counsel and a third party expert in modeling
insurance deductible amounts with respect to such matters. While the ultimate
outcome of any litigation cannot be predicted, management believes that adequate
provision has been made with respect to all known claims. There can be no
assurance that future events will not require the Company to increase the amount
it has accrued for any matter or accrue for a matter that has not been
previously accounted for. Based on information presently available and in light
of the merits of its defenses and the availability of insurance, the Company
does not expect the outcome of the above cases, singly or in the aggregate, to
have a material adverse effect on the Company's financial condition, results of
operation or liquidity.
The Company recorded its expected liability with respect to these claims in
Other liabilities and expected recoveries from its insurance carrier group in
Other Assets. The Company believes that realization of the insurance receivable
is probable due to the terms of the insurance policies, the financial strength
of the insurance carrier group and the payment experience to date of the
insurance carrier group as it relates to these claims.
Note 11. Reclassifications:
Certain reclassifications have been made to the prior year's financial
statements to conform to 2006 classifications.
Item 2. Management's Discussion and Analysis of Results of Operations
- ----------------------------------------------------------------------
and Financial Condition
- -----------------------
Overview
- --------
The Company is a leading creator and manufacturer of flavor and fragrance
compounds used to impart or improve the flavor or fragrance in a wide variety of
consumer products.
Fragrance compounds are used in perfumes, cosmetics, toiletries, hair care
products, deodorants, soaps, detergents and softeners as well as air care
products. Flavor products are sold to the food and beverage industries for use
in consumer products such as prepared foods, beverages, dairy, food and
confectionery products. The Company is also a leading manufacturer of synthetic
ingredients used in making fragrances.
Changing social habits resulting from such factors as changes in disposable
income, leisure time, health concerns, urbanization and population growth
stimulate demand for consumer products utilizing flavors and fragrances. These
developments expand the market for products with finer fragrance quality, as
well as the market for colognes and toiletries. Such developments also stimulate
demand for convenience foods, soft drinks and low-fat food products that must
conform to expected tastes. These developments necessitate the creation and
development of flavors and fragrances and ingredients that are compatible with
newly introduced materials and methods of application used in consumer products.
Flavors and fragrances are generally:
- created for the exclusive use of a specific customer;
- sold in solid or liquid form, in amounts ranging from a few kilograms to
many tons depending on the nature of the end product in which they are
used;
- a small percentage of the volume and cost of the end product sold to the
consumer; and
- a major factor in consumer selection and acceptance of the product.
Flavors and fragrances have similar economic and operational characteristics,
including research and development, the nature of the creative and production
processes, the manner in which products are distributed and the type of
customer; many of the Company's customers purchase both flavors and fragrances.
The flavor and fragrance industry is impacted by macroeconomic factors in all
product categories and geographic regions. Such macroeconomic factors include
the impact of currency translation on reported results and the impact currency
has on operating costs and the price of raw materials. In addition, pricing
pressure placed on the Company's customers by large and powerful retailers and
distributors is inevitably passed along to the Company, and its competitors.
Leadership in innovation and creativity mitigates the impact of pricing
pressure. Success and growth in the industry is dependent upon creativity and
innovation in meeting the many and varied needs of the customers' products in a
cost-efficient and effective manner, and with a consistently high level of
timely service and delivery.
The Company's strategic focus is:
- To improve customer service, in terms of both on-time deliveries and
responsiveness to new product development initiatives, and to improve the
win rate for new business with the Company's customers.
- To align resources of the Company with those of its strategic customers
using the global reach of the Company to provide and enhance strategic
partnerships.
- To focus research and development initiatives on those areas considered to
be most likely, in the long-term, to yield the greatest value to the
Company's customers and shareholders.
The Company has made strides in implementing a number of these strategies. On
time delivery and continuous improvement in operations are supported by the
global implementation of the enterprise requirements planning software package
("SAP"), and related initiatives, implementation of which are substantially
completed. Product and category growth and strategic analysis of these
objectives is a continual focus for management. A number of new ingredients have
been commercialized and are employed in flavor and fragrance compounds.
Operations
- ----------
Third Quarter 2006
- ------------------
Third quarter 2006 sales totaled $539 million, increasing 9% over the prior year
quarter; fragrance and flavor sales increased 12% and 6%, respectively. Reported
sales for the 2006 quarter benefited from the generally weaker U.S. dollar
during the quarter; at comparable exchange rates, sales would have increased 7%
in comparison to the 2005 quarter.
Fragrance sales were led by a 24% increase in fine fragrance sales, with much of
the growth driven by new product introductions. Sales of functional fragrances
increased 5% mainly as a result of increased volume and new product
introductions, while sales of ingredients increased 11% mainly due to increased
volumes.
The 6% flavor sales growth benefited from a combination of new wins and volume
growth. Flavor compounds increased in each region in both local currency and
dollars.
Sales performance by region and product category in comparison to the prior year
quarter in both reported dollars and local currency, where applicable, follows:
Third Quarter 2006 vs. 2005
% Change in Sales by Region of Destination
-------------------------------------------------------------------------
Fine Func'l. Ingr. Total Frag. Flavors Total
-------------------------------------------------------------------------
North America Reported 18% 3% 8% 9% 3% 7%
Europe Reported 19% 9% 9% 13% 6% 10%
Local Currency 13% 4% 5% 7% 1% 5%
Latin America Reported 51% 4% 9% 15% 5% 12%
Asia Pacific Reported 58% 5% 14% 16% 8% 11%
Local Currency 60% 2% 15% 14% 7% 10%
India Reported -19% -13% 61% -3% 11% 4%
Local Currency -20% -14% 57% -4% 11% 3%
Total Reported 24% 5% 11% 12% 6% 9%
Local Currency 21% 3% 8% 10% 4% 7%
-------------------------------------------------------------------------
- - North America fine fragrance and flavor growth was driven mainly by new
product introductions of $8 million and $6 million, respectively;
functional fragrance growth was primarily volume related, while the
increase in ingredients was the result of both volume and price.
- - European growth was strong across the continent; Western and Eastern Europe
and Russia, collectively increasing 6% over the 2005 quarter; a 3% decline
in the Middle East partially offset this growth. Fine and functional
fragrance growth was mainly the result of new product introductions of $12
million while the increases in the sale of ingredients and flavors were
both mainly volume related.
- - Latin America fine and functional fragrance sales growth resulted primarily
from $5 million and $3 million, respectively, in new product introductions;
ingredient growth was primarily volume related. Flavor sales were strong
throughout the region.
- - Asia Pacific fine and functional fragrance sales growth resulted from new
product introductions and volume growth in existing products. Ingredient
sales were primarily the result of volume increases. Flavor sales growth
was mainly the result of new product introductions.
- - India fragrance sales performance resulted from erosion in existing
products not compensated by new wins, while flavor sales increased as a
result of growth in existing products.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the third quarter are detailed below.
Third Quarter
-------------------------
2006 2005
----------- -----------
Costs of Goods Sold 57.5% 58.1%
Research and Development Expenses 8.6% 9.1%
Selling and Adminstrative Expenses 16.3% 17.4%
- - Gross profit, as a percentage of sales, improved 0.6 percentage points
compared to the prior year quarter. The improvement resulted mainly from
higher sales, improved manufacturing expense absorption and favorable
product mix.
- - Research and Development ("R&D") expenses totaled 8.6% of sales, compared
to 9.1% in the prior year quarter.
- - Selling, General and Administrative ("SG&A") expenses, as a percentage of
sales, were 16.3% compared to 17.4% in 2005. The 2005 quarter included $5
million relating to a product contamination issue; 2006 results include the
benefit of a $3 million insurance recovery related to this contamination
matter. The 2006 quarter also included $14 million in incentive
compensation expense; the 2005 quarter included $2 million of such expense.
- - Interest expense was flat with the prior year quarter; the average interest
rate on debt in the 2006 quarter was 3.2% compared to 3.4% in the prior
year quarter.
- - Other income (expense), net in the 2006 quarter increased over the prior
year quarter, mainly as a result of gains on disposal of fixed assets, as
well as somewhat higher interest income, partially offset by higher foreign
exchange losses.
- - The effective tax rate was 29.8% compared to (3.5%) in the prior year
quarter; the prior year quarter reflects the American Jobs Creation Act of
2004 ("AJCA") benefit of $23 million; excluding this benefit, the 2005
third quarter effective rate was 31.7%.
Net income for the 2006 quarter totaled $64 million, a 7% decrease compared with
the prior year quarter. The 2005 third quarter net income of $69 million
included the net tax benefit of $23 million on repatriation of dividends from
overseas affiliates under AJCA.
First Nine Months 2006
- -----------------------
For the nine-month period ended September 30, 2006, sales totaled $1,581
million, increasing 3% compared with the 2005 period. Reported sales for the
2006 period were affected by the strength of the U.S. dollar; had exchange rates
remained constant, sales would have been two percentage points higher than in
the 2005 nine-month period.
Sales performance by region and product category in comparison to the prior year
period, in both reported dollars and local currency, where applicable, follows:
Nine Months 2006 vs. 2005
% Change in Sales by Region of Destination
------------------------------------------------------------------------
Fine Func'l. Ingr. Total Frag. Flavors Total
------------------------------------------------------------------------
North America Reported 19% -1% 11% 9% 4% 6%
Europe Reported 4% 1% -9% - -1% -1%
Local Currency 6% 4% -7% 2% 1% 2%
Latin America Reported 25% 2% 6% 8% 12% 9%
Asia Pacific Reported 17% 1% 1% 4% 2% 3%
Local Currency 17% 1% 4% 5% 4% 4%
India Reported 3% -2% 27% 5% 11% 8%
Local Currency 3% -1% 30% 5% 11% 8%
Total Reported 11% 1% - 4% 3% 3%
Local Currency 13% 1% 2% 5% 4% 5%
------------------------------------------------------------------------
- - North America fine fragrance and flavor growth resulted mainly from new
product introductions of $29 million while the decline in functional
fragrances was volume related. Ingredient sales growth was due to a
combination of volume and price.
- - European growth was strongest in Eastern Europe, Africa and the Middle
East, partially offset by a decline in sales in Western Europe in the first
half of the year. Fine and functional fragrance growth resulted from new
product introductions of $36 million while the decline in ingredients was
volume related. The local currency flavor growth was the result of new
wins.
- - Latin America fine fragrance sales growth resulted from new product
introductions of $8 million while functional fragrance wins of $8 million
were partially offset by volume decreases. The ingredient sales increase
was volume related. Flavor sales were strong throughout the region, driven
mainly by new product introductions of $5 million and volume growth.
- - Asia Pacific fragrance sales growth resulted mainly from new product
introductions and volume growth amounting to $5 million; ingredients sales
growth was mainly volume related. Flavor sales growth is a result of new
product introductions and volume growth totaling slightly more than $5
million.
- - India fragrance sales performance in all product categories resulted
primarily from volume growth while flavor sales increased due to both
volume and new product growth.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the nine-month period ended September 30, 2006 and 2005 are
detailed below.
First Nine Months
-------------------------
2006 2005
----------- -----------
Costs of Goods Sold 57.4% 58.4%
Research and Development Expenses 8.7% 8.7%
Selling and Adminstrative Expenses 16.5% 16.6%
- - Gross profit, as a percentage of sales, improved compared to the prior year
period mainly as a result of sales performance, improved manufacturing
expense absorption and favorable product mix. In 2005, margin was
unfavorably impacted by costs attributable to the raw material
contamination matter.
- - R&D expenses totaled 8.7% of sales, consistent with the prior year.
- - SG&A expenses, as a percentage of sales, were 16.5% compared to 16.6% in
the prior year period. The comparison between 2006 and 2005 was impacted by
the contamination matter and related insurance recovery discussed above.
The 2006 period includes $31 million in incentive compensation expense; the
2005 period included $10 million of such expense.
- - Interest expense was flat with the prior year period.
- - Other income (expense), net primarily relates to the items recorded in the
third quarter.
- - The effective tax rate was 28.8% compared to 20.8% in the prior year
period. The 2005 tax rate was impacted by the $23 million benefit under
AJCA. Excluding this benefit, the 2005 period effective rate would have
been 31.2%; variations in the effective rate are mainly attributable to
fluctuations in earnings in the countries in which the Company operates.
The Company expects the effective tax rate to approximate 28.5% for 2006.
Net income for the 2006 period totaled $178 million, the same as in the
comparable 2005 period. The 2005 results included the net tax benefit of $23
million on repatriation of dividends from overseas affiliates under AJCA.
Restructuring and Other Charges
- -------------------------------
As described in Note 2 to the Consolidated Financial Statements in the Company's
2005 Annual Report, the Company has undertaken a significant reorganization,
including management changes, consolidation of production facilities and related
actions.
The Company undertook a plan to eliminate approximately 300 positions in
manufacturing, selling, research and administration functions, principally in
its European and North American operating regions. The majority of affected
positions involve employee separation while the balance relates to open
positions that will not be filled. As a result of these actions, the Company
recognized pre-tax charges of $23.3 million in the fourth quarter 2005 and $0.7
million in the first nine months of 2006; the Company recorded net restructuring
and other charges of $0.3 million in the third quarter of 2006. Annual savings
from these actions are expected to approximate $16.0 million to $18.0 million.
Movements in the liabilities related to the restructuring charges, included in
Restructuring and other charges or Other liabilities, as appropriate, were (in
millions):
Asset-
Employee- Related
Related and Other Total
---------------------------------------------
Balance December 31, 2005 $ 29.5 $ 4.9 $ 34.4
Additional charges 1.9 0.4 2.3
Cash and other costs (18.2) (2.8) (21.0)
-------------- ------------- --------------
Balance September 30, 2006 $ 13.2 $ 2.5 $ 15.7
============== ============= ==============
Consistent with the original plan the balance of employee-related liabilities
are expected to be utilized by 2008 as obligations are satisfied; the
asset-related charges will be utilized in 2007 on final decommissioning and
disposal of the affected equipment.
Equity Compensation Plans
- -------------------------
The Company previously applied the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") and provided the pro forma disclosures required by FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123").
Under APB 25, no compensation expense for employee or director stock options was
reflected in net earnings.
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R)
"Share-Based Payment" ("FAS 123 (R)") using the modified prospective method,
which requires measurement of compensation cost of all stock-based awards at
fair value on the date of grant and recognition of compensation expense over the
service periods for awards expected to vest. Under this transition method, 2006
compensation cost includes the portion vesting in the period for (1) all
share-based payments granted prior to, but not vested, as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of FAS 123, and (2) all share-based payments granted subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance with
the provisions of FAS 123(R). The Company will recognize the cost of all stock
options on a straight-line attribution basis over their respective vesting
periods, net of estimated forfeitures. Results for prior periods have not been
restated.
The Company changed its valuation model used for estimating the fair value of
options granted after January 1, 2006, from a Black-Scholes option-pricing model
to a Binomial lattice-pricing model, in order to provide a better estimate of
fair value; the Binomial model is considered a more flexible method for valuing
employee stock options than the Black-Scholes model. The flexibility of the
simulated Binomial model stems from the ability to incorporate inputs that
change over time, such as volatility and interest rates, and to allow for actual
exercise behavior of option holders. The Company is using an average of implied
and historical volatility while the expected term assumption was determined
based on historical patterns.
The Company has various equity plans under which the Company's officers, senior
management, directors and other key employees may be granted options to purchase
the Company's common stock or other forms of equity-based awards. Prior to 2004,
stock options were the primary form of equity compensation. Beginning in 2004,
the Company granted Restricted Stock Units ("RSU's") as the principal element of
its equity compensation plan for all eligible U.S. - based employees and a
majority of eligible overseas employees. Vesting of the RSU's for the Company's
officers and senior management has been performance and time based, and for the
remainder of eligible employees, vesting is solely time based; the vesting
period is primarily three years from date of grant. For a small group of
primarily overseas employees, the Company continues to grant stock options.
In 2006, the Board of Directors approved a Long Term Incentive Choice program
(the "Program") for the Company's senior management under the Company's 2000
Stock Award and Incentive Plan ("2000 SAIP"). Under the Program, eligible
employees can choose from among three equity alternatives and will be granted
such equity awards under the 2000 SAIP up to certain dollar awards depending on
the participant's grade level. A participant may choose among (1) Purchase
Restricted Stock ("PRS"), (2) Stock Settled Appreciation Rights ("SSAR's") or
(3) RSU's. The balance of employees who are not eligible under the Program
receive RSU's or, as noted above, options.
Developing the assumptions used in the binomial model requires significant
judgment on the part of the Company and, generally, may involve analyzing all
available historical data, considering whether historical data is relevant to
predicting future behavior, making appropriate adjustments to historical data
for future expectations, supplementing or replacing Company-specific historical
data with data from other supportable sources and appropriately weighting each
of the inputs. These assumptions are evaluated at each grant date. If factors
change and the Company employs different assumptions for estimating share-based
compensation expense in future periods or if the Company decides to use a
different valuation model, the future periods may differ significantly from what
the Company has recorded in the current period and could materially affect
operating income, net income and net income per share. In addition, existing
valuation models, including the Black-Scholes and binomial lattice-pricing
model, may not provide reliable measures of the fair values of the Company's
share-based compensation. Consequently, there is a significant risk that the
Company's estimates of the fair values of share-based compensation awards on the
grant dates may not reflect the actual values realized upon the vesting,
exercise, expiration, early termination or forfeiture of those share-based
payments in the future. There currently is no market-based mechanism or other
practical application to verify the reliability and accuracy of the estimates
stemming from these valuation models.
The future impact of the cost of share-based compensation on our results of
operations, including net income and earnings per diluted share, will depend on,
among other factors, the level of our equity awards as well as the market price
of our shares at the time of award as well as various other assumptions used in
valuing such awards.
See Note 7 of the Notes to the unaudited Consolidated Financial Statements for
additional discussion of the impact of the adoption of, and the method of
determining fair values under, FAS 123(R).
Financial Condition
- -------------------
Cash, cash equivalents and short-term investments totaled $163 million at
September 30, 2006. Working capital at September 30, 2006 was $399 million
compared to $(11) million at December 31, 2005. The change in working capital
relates to the refinancing of long-term debt classified as current at December
31, 2005. Gross additions to property, plant and equipment during the first nine
months were $31 million. The Company expects additions to property, plant and
equipment to approximate $50 million for the full year 2006.
At September 30, 2006, the Company had $808 million of debt outstanding. On July
12, 2006, the Company issued an aggregate of $375 million of Senior Unsecured
Notes. The Notes were issued in four series: (i) $50.0 million in aggregate
principal amount of 5.89% Series A Senior Notes due July 12, 2009, (ii) $100.0
million in aggregate principal amount of 5.96% Series B Notes due July 12, 2011,
(iii) $100.0 million in aggregate principal amount of 6.05% Series C Notes due
July 12, 2013 and (iv) $125.0 million in aggregate principal amount of 6.14%
Series D Notes due July 12, 2016. Proceeds of the Notes were used to repay the
commercial paper and for other general corporate purposes.
In April and July 2006, the Company paid a quarterly cash dividend of $.185 per
share to shareholders, unchanged from the prior quarter dividend payment. On
October 11, 2006, the Company announced a 14% increase in its quarterly dividend
rate to $.21 per share effective with the dividend payable in January 2007.
Under the share repurchase program of $200.0 million authorized in May 2005, the
Company repurchased approximately 1.9 million shares in the third quarter of
2006 at a cost of $71 million. In 2006, the Company has repurchased 4.6 million
shares at a cost of $162 million. At September 30, 2006, the Company had
approximately $15 million remaining under this repurchase plan. On October 11,
2006, the Company announced that its Board of Directors had authorized a new
$300 million share repurchase program, expected to be completed over the next 18
- - 24 months. At the current market price, the new program would enable the
repurchase of approximately 7.5 million shares, or 8% of shares currently
outstanding. Repurchases will be made from time to time on the open market or
through private transactions as market and business conditions warrant.
Repurchased shares will be available for use in connection with the Company's
employee compensation plans and for other general corporate purposes.
The Company anticipates that its financing requirements will be funded from
internal sources and credit facilities currently in place. Cash flows from
operations and availability under its existing credit facilities are expected to
be sufficient to fund the Company's anticipated normal capital spending,
dividends and other expected requirements for at least the next eighteen months.
Non-GAAP Financial Measures
- ---------------------------
To supplement the Company's financial results presented in accordance with U.S.
Generally Accepted Accounting Principles ("GAAP"), the Company uses certain
non-GAAP financial measures. These non-GAAP financial measures should not be
considered in isolation, or as a substitute for, or superior to, financial
measures calculated in accordance with GAAP. These non-GAAP financial measures
as disclosed by the Company may also be calculated differently from similar
measures disclosed by other companies. To ease the use and understanding of our
supplemental non-GAAP financial measures, the Company includes the most directly
comparable GAAP financial measure.
The Company discloses, and management internally monitors, the sales performance
of international operations on a basis that eliminates the positive or negative
effects that result from translating foreign currency sales into U.S. dollars.
Management uses this measure because it believes that it enhances the assessment
of the sales performance of its international operations and the comparability
between reporting periods.
The Company has also provided net income and the effective tax rate for the 2005
third quarter which excludes the impact of a one-time benefit under the AJCA of
repatriation of dividends from overseas affiliates. Management believes that
given the unique nature of these items, including this information without the
impact of repatriation in the prior year period is more representative of the
Company's operational performance and may assist investors in evaluating the
Company's period to period financial results, in a manner consistent with how
management has evaluated such performance.
Cautionary Statement Under The Private Securities Litigation Reform Act
- -----------------------------------------------------------------------
of 1995
- -------
Statements in this Quarterly Report, which are not historical facts or
information, are "forward-looking statements" within the meaning of The Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
based on management's reasonable current assumptions and expectations. Such
forward-looking statements which may be identified by such words as "expect,"
"believe," "anticipate," "outlook," "guidance," "may," and similar
forward-looking terminology, involve significant risks, uncertainties and other
factors, which may cause the actual results of the Company to be materially
different from any future results expressed or implied by such forward-looking
statements, and there can be no assurance that actual results will not differ
materially from management's expectations. Such factors include, among others,
the following: general economic and business conditions in the Company's
markets, including economic, population health and political uncertainties;
weather, geopolitical, civil hostilities and region specific uncertainties;
interest rates; the price, quality and availability of raw materials; the
Company's ability to implement its business strategy, including the achievement
of anticipated cost savings, profitability, growth and market share targets; the
impact of currency fluctuation or devaluation in the Company's principal foreign
markets and the success of the Company's hedging and risk management strategies;
the impact of possible pension funding obligations and increased pension expense
on the Company's cash flow and results of operations; and the effect of legal
and regulatory proceedings, as well as restrictions imposed on the Company, its
operations or its representatives by foreign governments; and the fact that the
outcome of litigation is highly uncertain and unpredictable and there can be no
assurance that the triers of fact or law, at either the trial level or at any
appellate level, will accept the factual assertions, factual defenses or legal
positions of the Company or its factual or expert witnesses in any such
litigation or other proceedings. The Company intends its forward-looking
statements to speak only as of the time of such statements and does not plan to
update or revise them as more information becomes available or to reflect
changes in expectations, assumptions or results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
There are no material changes in market risk from the information provided in
the Company's 2005 Annual Report on Form 10-K.
Item 4. Controls and Procedures
- -------------------------------
The Company's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Company's management, have evaluated the
effectiveness of the Company's disclosure controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective as of the end of the reporting period covered by this report.
The Company's Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Company's internal control
over financial reporting during the quarter ended September 30, 2006 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
-----------------
The Company is subject to various claims and legal actions in the ordinary
course of its business.
Since September 2001 the Company has been involved in actions where
plaintiffs allege respiratory injuries in the workplace due to the use by their
employers of an International Flavors & Fragrances Inc. ("IFF") and/or Bush
Boake Allen Inc. ("BBA") flavor. For purposes of reporting on these actions, IFF
and BBA are jointly referred to as the "Company". See the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2006 under "Legal Proceedings"
for an update on these cases. Since this Report, all plaintiff cases related to
the Benavides case have been resolved by confidential settlement. Also, in the
Arthur case, the first trial group of 2 workers and 1 spouse which was due to
commence trial on August 29, 2006 was resolved by confidential settlement. In
August 2006, 2 additional cases were filed against the Company, another flavor
supplier and 2 chemical companies in the Circuit Court of Jasper County,
Missouri. The first involves 29 current and former employees and/or a neighbor
of the Gilster-Mary Lee microwave popcorn plant in Jasper, Missouri (Arles case)
and the second 5 current and former employees of the same plant (Bowan case).
The Company believes that all IFF and BBA flavors at issue in these matters
met the requirements of the U.S. Food and Drug Administration and were safe for
handling and use by workers in food manufacturing plants when used according to
specified safety procedures. These procedures are detailed in instructions that
IFF and BBA provided to all its customers for the safe handling and use of these
flavors. It is the responsibility of the Company's customers to ensure that
these instructions, which include the use of appropriate engineering controls,
such as adequate ventilation, proper handling procedures and respiratory
protection for workers, were followed in the workplace.
At each balance sheet date the Company reviews the status of each of these
claims, as well as its insurance coverage for such claims with due consideration
of potentially applicable deductibles, retentions and reservations of rights
under its insurance policies, and the advice of its outside legal counsel with
respect to all of these matters. Ultimate outcome of any litigation cannot be
predicted with certainty; management believes that adequate provision has been
made with respect to such pending claims. In addition, based on information
presently available and in light of the merits of its defenses and the
availability of insurance, the Company does not expect the outcome of the above
cases, singly or in the aggregate, to have a material adverse effect on the
Company's financial condition, results of operation or liquidity. There can be
no assurance, however, that future events will not require the Company to
increase the amount it has accrued for any matter or accrue for a matter that
had not been previously accrued because it was not considered probable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
(c) Issuer Purchases of Equity Securities
-------------------------------------
Total Number of Shares Approximate Dollar Value
Total Number Purchased as Part of of Shares that may yet be
of Shares Average Price Publicly Announced purchased under
Purchased (1) Paid per Share Program (1) the Program (2)
------------------- ------------------ --------------------------- ------------------------------
July 1 - 31, 2006 64,800 $37.15 64,800 $83,501,000
August 1 - 31, 2006 1,630,254 $38.04 1,630,254 $21,483,000
Sept. 1 - 30, 2006 166,000 $39.04 166,000 $15,002,000
(1) An aggregate of 1,861,054 shares of common stock were repurchased during
the third quarter of 2006 under a repurchase program announced in May 2005.
Under the program, the Board of Directors approved the repurchase by the
Company of up to $200 million of its common stock. This program is near
completion.
(2) The Board of Directors approved an additional share repurchase program of
$300 million of its common stock in October 2006.
Item 6. Exhibits
--------
3(ii)By-Laws of the Company, as amended effective as of October 10, 2006
(incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed
with the SEC on October 11, 2006).
4.1 Note Purchase Agreement, dated as of July 12, 2006, by and among the
Company and the various purchasers named therein (incorporated by reference
to Exhibit 4.7 to the Company's Form 8-K filed with the SEC on July 13,
2006).
4.2 Form of Series A, Series B, Series C and Series D Senior Notes
(incorporated by reference to Exhibit 4.8 to the Company's Form 8-K filed
with the SEC on July 13, 2006).
10.1 Restricted Stock Units Agreement dated July 25, 2006 between International
Flavors & Fragrances Inc. and Arthur C. Martinez (incorporated by reference
to Exhibit 10.1 to the Company's Form 8-K filed with the SEC on July 26,
2006).
10.2 Letter Agreement dated June 28, 2006 between the Company and Robert M.
Amen, Chairman of the Board of Directors and Chief Executive Officer
(incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed
with the SEC on June 29, 2006).
31.1 Certification of Robert M. Amen pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Douglas J. Wetmore pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Robert M. Amen and Douglas J. Wetmore pursuant to 18
U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
Dated: November 2, 2006 By: /s/ DOUGLAS J. WETMORE
-----------------------------------------
Douglas J. Wetmore, Senior Vice President
and Chief Financial Officer
Dated: November 2, 2006 By: /s/ DENNIS M. MEANY
----------------------------------------
Dennis M. Meany, Senior Vice President,
General Counsel and Secretary
EXHIBIT INDEX
Number Description
- ------ -----------
3(ii)By-Laws of the Company, as amended effective as of October 10, 2006
(incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed
with the SEC on October 11, 2006).
4.1 Note Purchase Agreement, dated as of July 12, 2006, by and among the
Company and the various purchasers named therein (incorporated by reference
to Exhibit 4.7 to the Company's Form 8-K filed with the SEC on July 13,
2006).
4.2 Form of Series A, Series B, Series C and Series D Senior Notes
(incorporated by reference to Exhibit 4.8 to the Company's Form 8-K filed
with the SEC on July 13, 2006).
10.1 Restricted Stock Units Agreement dated July 25, 2006 between International
Flavors & Fragrances Inc. and Arthur C. Martinez (incorporated by reference
to Exhibit 10.1 to the Company's Form 8-K filed with the SEC on July 26,
2006).
10.2 Letter Agreement dated June 28, 2006 between the Company and Robert M.
Amen, Chairman of the Board of Directors and Chief Executive Officer
(incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed
with the SEC on June 29, 2006).
31.1 Certification of Robert M. Amen pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Douglas J. Wetmore pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Robert M. Amen and Douglas J. Wetmore pursuant to 18
U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002.
Exhibit 31.1
CERTIFICATION
-------------
I, Robert M. Amen, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of International Flavors
& Fragrances Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: November 2, 2006
By: /s/ Robert M. Amen
-------------------------------
Name: Robert M. Amen
Title: Chairman of the Board
and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
-------------
I, Douglas J. Wetmore, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of International Flavors
& Fragrances Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: November 2, 2006
By: /s/ Douglas J. Wetmore
-------------------------------
Name: Douglas J. Wetmore
Title: Senior Vice President
and Chief Financial Officer
Exhibit 32
CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of International Flavors &
Fragrances Inc. (the "Company") for the quarterly period ended September 30,
2006 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), Robert M. Amen, as Chief Executive Officer of the Company, and
Douglas J. Wetmore, as Chief Financial Officer, each hereby certifies, pursuant
to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ Robert M. Amen
- ----------------------------------
Name: Robert M. Amen
Title: Chairman of the Board
and Chief Executive Officer
Dated: November 2, 2006
By: /s/ Douglas J. Wetmore
- -------------------------------
Name: Douglas J. Wetmore
Title: Senior Vice President
and Chief Financial Officer
Dated: November 2, 2006
