UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20162017
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, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þAccelerated 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 OctoberJuly 24, 20162017: 79,423,80678,975,735


1


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

 September 30, 2016 December 31, 2015 June 30, 2017 December 31, 2016
ASSETS        
Current Assets:        
Cash and cash equivalents $498,730
 $181,988
 $491,386
 $323,992
Trade receivables (net of allowances of $9,424 and $8,229, respectively) 587,074
 537,896
Trade receivables (net of allowances of $12,772 and $9,995, respectively) 665,511
 550,658
Inventories: Raw materials 279,928
 265,209
 309,544
 288,629
Work in process 16,140
 17,450
 17,828
 13,792
Finished goods 289,117
 289,388
 296,390
 289,596
Total Inventories 585,185
 572,047
 623,762
 592,017
Prepaid expenses and other current assets 186,046
 145,178
 213,267
 142,347
Total Current Assets 1,857,035
 1,437,109
 1,993,926
 1,609,014
Property, plant and equipment, at cost 1,876,926
 1,812,283
 2,022,866
 1,913,333
Accumulated depreciation (1,131,685) (1,079,489) (1,211,040) (1,137,617)
 745,241
 732,794
 811,826
 775,716
Goodwill 941,511
 941,389
 1,145,165
 1,000,123
Other intangible assets, net 284,608
 306,004
 426,064
 365,783
Deferred income taxes 148,621
 166,323
 150,359
 138,636
Other assets 120,113
 118,391
 91,535
 127,712
Total Assets $4,097,129
 $3,702,010
 $4,618,875
 $4,016,984
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current Liabilities:        
Bank borrowings and overdrafts and current portion of long-term debt $257,675
 $132,349
 $257,873
 $258,516
Accounts payable 259,208
 285,501
 265,900
 274,815
Accrued payroll and bonus 59,807
 48,843
 53,833
 64,357
Dividends payable 50,871
 44,824
 50,621
 50,678
Other current liabilities 228,363
 213,639
 232,996
 249,931
Total Current Liabilities 855,924
 725,156
 861,223
 898,297
Long-term debt 1,110,201
 935,373
 1,636,338
 1,066,855
Deferred gains 40,856
 43,260
 38,529
 39,816
Retirement liabilities 244,288
 242,383
 251,154
 243,407
Other liabilities 147,662
 160,849
 151,545
 137,475
Total Other Liabilities 1,543,007
 1,381,865
 2,077,566
 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, 2016 and December 31, 2015 and outstanding 79,476,755 and 80,022,291 shares as of September 30, 2016 and December 31, 2015 14,470
 14,470
Common stock 12 1/2¢ par value; authorized 500,000,000 shares; issued 115,858,190 shares as of June 30, 2017 and December 31, 2016 and outstanding 78,975,563 and 79,213,037 shares as of June 30, 2017 and December 31, 2016 14,470
 14,470
Capital in excess of par value 146,551
 140,802
 148,445
 152,481
Retained earnings 3,789,271
 3,604,254
 3,909,200
 3,818,535
Accumulated other comprehensive loss (611,647) (613,440) (676,201) (680,095)
Treasury stock, at cost - 36,381,435 shares as of September 30, 2016 and 35,835,899 shares as of December 31, 2015 (1,644,869) (1,555,769)
Treasury stock, at cost - 36,882,627 shares as of June 30, 2017 and 36,645,153 shares as of December 31, 2016 (1,721,556) (1,679,147)
Total Shareholders’ Equity 1,693,776
 1,590,317
 1,674,358
 1,626,244
Noncontrolling interest 4,422
 4,672
 5,728
 4,890
Total Shareholders’ Equity including noncontrolling interest 1,698,198
 1,594,989
 1,680,086
 1,631,134
Total Liabilities and Shareholders’ Equity $4,097,129
 $3,702,010
 $4,618,875
 $4,016,984

See Notes to Consolidated Financial Statements

2


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,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
Net sales$777,001
 $765,092
 $2,353,790
 $2,307,540
$842,861
 $793,478
 $1,671,154
 $1,576,789
Cost of goods sold430,733
 417,966
 1,281,673
 1,269,097
468,272
 427,837
 931,899
 850,940
Gross profit346,268
 347,126
 1,072,117
 1,038,443
374,589
 365,641
 739,255
 725,849
Research and development expenses64,415
 62,750
 191,052
 188,725
70,320
 63,252
 140,031
 126,637
Selling and administrative expenses152,046
 122,249
 408,372
 372,267
135,910
 132,784
 276,240
 256,327
Amortization of acquisition-related intangibles5,468
 5,414
 16,659
 10,293
8,494
 5,130
 15,561
 11,191
Restructuring and other charges, net—
 —
 —
 (170)791
 —
 10,934
 —
Gain on sales of fixed assets(68) (197) (89) (2,910)
Operating profit124,339
 156,713
 456,034
 467,328
159,142
 164,672
 296,578
 334,604
Interest expense13,111
 11,855
 40,649
 34,357
17,556
 15,060
 30,363
 27,539
Other (income) expense, net(2,162) 1,959
 (4,952) (3,315)(454) (2,438) (14,312) 118
Income before taxes113,390
 142,899
 420,337
 436,286
142,040
 152,050
 280,527
 306,947
Taxes on income23,613
 36,452
 95,223
 96,206
32,245
 35,317
 54,968
 71,610
Net income89,777
 106,447
 325,114
 340,080
109,795
 116,733
 225,559
 235,337
Other comprehensive income (loss), after tax:              
Foreign currency translation adjustments(6,191) (48,368) 3,198
 (81,326)13,347
 (4,689) 10,090
 9,389
(Losses) gains on derivatives qualifying as hedges268
��(12,498) (9,124) (6,381)(11,768) 800
 (13,519) (9,392)
Pension and postretirement net liability2,586
 5,478
 7,719
 16,501
3,688
 2,578
 7,323
 5,133
Other comprehensive income (loss)(3,337) (55,388) 1,793
 (71,206)5,267
 (1,311) 3,894
 5,130
Total comprehensive income$86,440
 $51,059
 $326,907
 $268,874
$115,062
 $115,422
 $229,453
 $240,467
              
Net income per share - basic$1.13
 $1.32
 $4.07
 $4.20
$1.39
 $1.46
 $2.85
 $2.94
Net income per share - diluted$1.12
 $1.31
 $4.05
 $4.18
$1.38
 $1.46
 $2.84
 $2.93
Average number of shares outstanding - basic79,580
 80,330
 79,727
 80,602
79,072
 79,764
 79,088
 79,809
Average number of shares outstanding - diluted79,935
 80,737
 80,067
 81,052
79,305
 80,040
 79,360
 80,141
Dividends declared per share$0.64
 $0.56
 $1.76
 $1.50
$0.64
 $0.56
 $1.28
 $1.12
See Notes to Consolidated Financial Statements

3


INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
  Six Months Ended June 30,
  2017 2016
Cash flows from operating activities:    
Net income $225,559
 $235,337
Adjustments to reconcile to net cash provided by operating activities:    
Depreciation and amortization 55,805
 49,743
Deferred income taxes 1,505
 16,543
Gain on disposal of assets (89) (2,910)
Stock-based compensation 12,893
 13,774
Pension contributions (31,557) (39,510)
Litigation settlement (56,000) —
Foreign currency gain on liquidation of entity (12,214) —
Changes in assets and liabilities, net of acquisitions:    
Trade receivables (77,580) (70,361)
Inventories (4,228) (7,271)
Accounts payable (23,479) (29,167)
Accruals for incentive compensation (12,316) (2,001)
Other current payables and accrued expenses (3,099) 13,400
Other assets 18,007
 4,054
Other liabilities (35,286) (9,335)
Net cash provided by operating activities 57,921
 172,296
Cash flows from investing activities:    
Cash paid for acquisitions, net of cash received (191,304) —
Additions to property, plant and equipment (46,153) (43,236)
Proceeds from life insurance contracts 1,941
 —
Maturity of net investment hedges 3,016
 (641)
Proceeds from disposal of assets 473
 3,630
Net cash used in investing activities (232,027) (40,247)
Cash flows from financing activities:    
Cash dividends paid to shareholders (101,184) (89,463)
Increase (decrease) in revolving credit facility borrowings and overdrafts 21,595
 (138,142)
Deferred financing costs (5,373) (4,796)
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
 494
Employee withholding taxes paid (11,485) (13,315)
Purchase of treasury stock (53,211) (71,714)
Net cash provided by financing activities 343,611
 235,379
Effect of exchange rate changes on cash and cash equivalents (2,111) (9,424)
Net change in cash and cash equivalents 167,394
 358,004
Cash and cash equivalents at beginning of year 323,992
 181,988
Cash and cash equivalents at end of period $491,386
 $539,992
Interest paid, net of amounts capitalized $21,817
 $24,971
Income taxes paid $50,962
 $52,719
  Nine Months Ended September 30,
  2016 2015
Cash flows from operating activities:    
Net income $325,114
 $340,080
Adjustments to reconcile to net cash provided by operating activities:    
Depreciation and amortization 75,109
 65,099
Deferred income taxes 8,323
 13,134
Gain on disposal of assets (2,998) (341)
Stock-based compensation 19,471
 18,355
Pension contributions (44,356) (61,125)
Changes in assets and liabilities, net of acquisitions:    
Trade receivables (36,070) (108,563)
Inventories (160) (31,655)
Accounts payable (29,523) 54,482
Accruals for incentive compensation 3,012
 (13,781)
Other current payables and accrued expenses 30,663
 34,585
Other assets (10,155) (30,098)
Other liabilities (9,077) 14,523
Net cash provided by operating activities 329,353
 294,695
Cash flows from investing activities:    
Cash paid for acquisitions, net of cash received —
 (493,469)
Additions to property, plant and equipment (70,179) (66,632)
Proceeds from life insurance contracts 292
 868
Maturity of net investment hedges (12) 9,735
Proceeds from disposal of assets 3,664
 3,431
Net cash used in investing activities (66,235) (546,067)
Cash flows from financing activities:    
Cash dividends paid to shareholders (134,051) (113,875)
Increase (decrease) in revolving credit facility borrowings and overdrafts (133,687) 249,998
Deferred financing costs (4,780) —
Repayments of debt (125,000) —
Proceeds from issuance of long-term debt 555,559
 —
Loss on pre-issuance hedges (3,244) —
Proceeds from issuance of stock under stock plans 594
 288
Excess tax benefits on stock-based payments 4,532
 11,704
Purchase of treasury stock (94,148) (81,237)
Net cash provided by financing activities 65,775
 66,878
Effect of exchange rate changes on cash and cash equivalents (12,151) (21,803)
Net change in cash and cash equivalents 316,742
 (206,297)
Cash and cash equivalents at beginning of year 181,988
 478,573
Cash and cash equivalents at end of period $498,730
 $272,276
Interest paid, net of amounts capitalized $45,008
 $42,871
Income taxes paid $80,050
 $71,167
See Notes to Consolidated Financial Statements

4


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 20152016 Annual Report on Form 10-K (“20152016 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, SeptemberJune 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 20162017 and 20152016 quarters, the actual closing dates were SeptemberJune 30, and October 2,July 1, 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 Balance Sheet asStatement of December 31, 2015,Comprehensive Income has been revised to properly reflect in-bound goodsGain on sales of fixed assets within Operating profit for the three and six months ending June 30, 2016. These amounts were previously included in transit. Accordingly, Inventory and Accounts payable decreased by $17.0 million.Other (income) expense, net. The Consolidated Statement of Cash Flows has been revised to properly reclassify $5.4 million from Other current payables to Other assets for the six months ending June 30, 2016. This adjustment had no impact on Net cash provided from operating activities. In addition, approximately $5.4 million of expense was recorded during the first quarter of 2017 for a tax assessment relating to prior periods. These adjustments were not material to the previously issuedcurrent and previously-issued financial statements.
Recent Accounting Pronouncements
In August 2016,May 2017, the Financial Accounting Standards Board (“FASB”) issued amendments to the Compensation - Stock Compensation guidance which clarifies which changes to the terms or conditions of a share-based payment award 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 retroactively, 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.
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.
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. The Company plans to adopt this guidance in accordance with its existing annual impairment review policy in 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 willto have a significant impact on its statementConsolidated Statement of cash flows.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 will bewas effective for annual and interim periods beginning after December 15, 2016. Early adoption will be permitted for all entities. Among other changes,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 expects to adoptadopted this change retroactivelyretrospectively, resulting in a $11.5 million and that the impact of this aspect of the standard$13.3 million increase to Net cash provided by operating activities on the Consolidated Statement of Cash Flows willas of June 30, 2017 and 2016, respectively. In addition, the standard requires that excess tax benefits presented in the Consolidated Statement of Cash Flows be approximately $20-$25 million onclassified as an annual basis.operating activity instead of a financing activity. The Company is currently evaluatingadopted this change retrospectively, resulting in a $3.2 million and $4.4 million increase to Net cash provided by operating activities on the other changes required byConsolidated Statement of Cash Flows as of June 30, 2017 and 2016, respectively.
The standard also requires all excess tax benefits/deficiencies be recognized as income tax expense/benefit in the standard.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 June 30, 2017. The 2016 period included a $4.2 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 31, 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 September 2015, the FASB issued authoritative guidance relating to the adjustments made during the measurement period for items in a business combination. Specifically, the new guidance requires adjustments related to the finalization of estimates to be recorded in the period when they are determined and to provide certain additional disclosures. This guidance is effective for fiscal years beginning after December 15, 2015. The Company adopted this guidance during 2016 and the adoption did not have a significant impact on its consolidated financial statements.
In April 2015, the FASB issued authoritative guidance which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is effective for annual and interim periods beginning after December 15, 2015. The Company adopted this guidance retrospectively in 2016 and accordingly has reclassified all debt issuance costs on long-term debt as a direct deduction from the

5


carrying amount of the debt liability in the Consolidated Balance Sheet as of December 31, 2015. The adoption of this guidance did not have a significant impact on its consolidated financial statements.
In May 2014, the FASB issued authoritative guidance to clarify the principlesthat 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 recognize revenue and made subsequent clarifications underdepict the new requirements during May 2016. Thetransfer 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. Adoption asCompanies 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 original effectivenew guidance recognized at the date is permitted.of initial application within the Consolidated Balance Sheet. 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 is also currently evaluating the impact that this new standard will have onmethod of adoption and the potential impacts to its consolidated financial statements.statements and related disclosures.
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 decreased


approximately $25.8$4.7 million for the ninesix months ended SeptemberJune 30, 20162017 compared to an increase of approximately $0.2$17.7 million for the ninesix months ended SeptemberJune 30, 2015.2016. 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,Three Months Ended June 30, Six Months Ended June 30,
(SHARES IN THOUSANDS)2016 2015 2016 20152017 2016 2017 2016
Basic79,580
 80,330
 79,727
 80,602
79,072
 79,764
 79,088
 79,809
Assumed dilution under stock plans355
 407
 340
 450
233
 276
 272
 332
Diluted79,935
 80,737
 80,067
 81,052
79,305
 80,040
 79,360
 80,141
An immaterial amount ofThere were no stock options or stock-settled appreciation rights (“SSARs”) were excluded from the computation of diluted net income per share for the three and ninesix months ended SeptemberJune 30, 2016. There2017. An immaterial amount of SSARs were no stock options or SSARs excluded from the 2015 periods.2016 period.
The Company has issued shares of purchased restricted common stock and purchasepurchased 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 SeptemberJune 30, 20162017 and 20152016 was immaterial. Net income allocated to such PRSUs was $0.2 million and $0.5$0.3 million for the three months ended SeptemberJune 30, 20162017 and 20152016, respectively and $0.8$0.5 million and $1.6 million during each of the ninesix months ended SeptemberJune 30, 20162017 and 2015, respectively.2016.
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 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 third 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 approximately $242 million. Theunder the purchase price was funded from existing resources.method. David Michael was acquired to strengthen the North American flavors business. The acquisition will be accounted for as a business combination and is not expected to have a material impact on the consolidated statement of comprehensive income for 2016.
2015 Activity
Lucas Meyer
During the third quarter of 2015, the Company completed the acquisition of 100% of the outstanding shares of Lucas Meyer Cosmetics, a business of Unipex Group. The total shares acquired include shares effectively acquired pursuant to put and call option agreements. The acquisition was accounted for under the purchase method. Total consideration waspaid approximately Euro 284.0$242.6 million ($312.1 million), including approximately $4.8(including $5.1 million of cash acquired. The Company paid

6


Euro 282.1 million (approximately $309.9 million)acquired) for thethis acquisition, which was funded from existing resources,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 recorded a liability of approximately Euro 2.0 million (approximately $2.2 million) for shares to be purchased under the put and call option agreements.paid an additional $0.6 million. The purchase price exceeded the fair value of existing net assets by approximately $290.1$168.7 million. The excess was allocated principally to identifiable intangible assets (approximately $156.4 million), goodwill (approximately $179.5 million)including approximately $50.0 million related to customer relationships, approximately $8.4 million related to proprietary technology and trade name and approximately $38.1$110.2 million to deferred taxes.of goodwill (which is deductible for tax purposes). Goodwill representsis the excess of the purchase price over the fair value of net assets acquired. Separately identifiable intangible assets are principally relatedacquired and represents synergies from the addition of David Michael to customer relationships, proprietary technology and patents.the Company's existing Flavors business. The intangible assets are being amortized over the following estimated useful lives: trade names andname, 2 years, proprietary technology, 28 years;5 years and customer relationships, 23 years; patents, 11 years; and non-solicitation agreements, 318 - 20 years.
No pro forma financial information for 20152016 is presented as the impact of the acquisition was immaterial to the Consolidated Statement of Comprehensive Income. The purchase price allocation was completed during the second quarter of 2016.
Ottens Flavors
During the second quarter of 2015, the Company completed the acquisition of 100% of the outstanding shares of Henry H. Ottens Manufacturing Co., Inc. ("Ottens Flavors"). The acquisition was accounted for under the purchase method. The Company paid $198.9 million (including $10.4 million of cash acquired) for this acquisition, which was funded from existing resources. The purchase price allocation was completed during the fourth quarter of 2015. No pro forma financial information for 2015 is presented as the impact of the acquisition was not material to the consolidated financial statements.
Note 4. Restructuring and Other Charges, Net:
During
2017 Productivity Program

On February 15, 2017, the fourthCompany 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 $10.1 million and $3.1 million of charges related to personnel-related costs and lease termination costs during the first and second quarter of 2017, respectively, with the remainder of the personnel-related costs expected to be recognized by the end of 2017 and the other costs expected to be recognized over the following six quarters. The Company made payments of $2.1 million and $4.5 million related to severance in the first and second quarters of 2017, respectively. 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, in the fourth quarter of 2015, the Company recorded a pre-tax charge of $7.6 million, included in restructuring and other charges net, related tofor severance and related costs pertaining to approximately 150 positions that will bewere affected. During 2016,the first quarter of 2017, the Company made payments of $1.8$0.2 million andrelated to severance. During the second quarter of 2017, the Company recorded accelerated depreciation expensea credit of $0.5 million. The total cost$2.3 million related to the reversal of the plan is expectedseverance accruals that were determined to be approximately $10.5 million with the remaining charges relating principallyno longer required. No further actions are expected related to accelerated depreciation. The Company expects the plan to be fully implemented in the second half of 2017.these 2015 initiatives.
Changes in employee-related restructuring liabilities during the ninesix months ended SeptemberJune 30, 20162017, were as follows:
(DOLLARS IN THOUSANDS)Employee-Related Costs Accelerated Depreciation TotalEmployee-Related Costs Other Total
Balance at December 31, 2015$7,882
 $—
 $7,882
Balance at December 31, 2016$3,277
 $—
 $3,277
Additional charges (reversals), net—
 473
 473
9,984
 950
 10,934
Non-cash charges—
 (473) (473)—
 (950) (950)
Payments and other costs(1,801) —
 (1,801)
Balance at September 30, 2016$6,081
 $—
 $6,081
Payments(6,776) —
 (6,776)
Balance at June 30, 2017$6,485
 $—
 $6,485
Note 5. Goodwill and Other Intangible Assets, Net:
Goodwill
Movements in goodwill during 20162017 were as follows:
(DOLLARS IN THOUSANDS)GoodwillGoodwill
Balance at December 31, 2015$941,389
Balance at December 31, 2016$1,000,123
Acquisitions93,223
Foreign exchange4,777
15,782
Other(4,655)36,037
Balance at September 30, 2016$941,511
Balance at June 30, 2017$1,145,165
The decrease reflected in Other above isprincipally represents the impactincrease to Goodwill associated with the update of finalizingcertain customer relationship assumptions in the final purchase price allocation of Lucas MeyerDavid Michael, as disclosed in Note 3.



7


Other Intangible Assets
Other intangible assets, net consist of the following amounts: 
September 30, December 31,June 30, December 31,
(DOLLARS IN THOUSANDS)2016 20152017 2016
Cost      
Customer relationships$290,838
 $293,799
$407,612
 $371,270
Trade names & patents31,718
 34,182
37,817
 30,679
Technological know-how111,842
 112,393
153,090
 119,544
Other24,088
 22,711
24,692
 24,470
Total carrying value458,486
 463,085
623,211
 545,963
Accumulated Amortization      
Customer relationships(77,935) (66,324)(93,289) (82,555)
Trade names & patents(11,743) (10,282)(13,625) (12,198)
Technological know-how(67,279) (65,258)(71,404) (68,292)
Other(16,921) (15,217)(18,829) (17,135)
Total accumulated amortization(173,878) (157,081)(197,147) (180,180)
      
Other intangible assets, net$284,608
 $306,004
$426,064
 $365,783
 





Amortization
Amortization expense was $5.58.5 million and $5.4$5.1 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively and $16.7$15.6 million and $10.3$11.2 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Annual amortization is expected to be $21.9$34.5 million for the full year 2016, $21.5 million for the year 2017, $21.2$34.5 million for the year 2018, $20.1$32.9 million for the year 2019, $19.4$32.2 million for the year 2020, and $15.2$27.5 million for the year 2021.2021 and $25.1 million for the year 2022.
Note 6. Borrowings:
Debt consists of the following:
(DOLLARS IN THOUSANDS)Rate Maturities September 30, 2016 December 31, 2015Rate Maturities June 30, 2017 December 31, 2016
Senior notes - 2006 (1)
6.14% 2016 $—
 $124,964
Senior notes - 2007 (1)
6.40% 2017-27 499,638
 499,618
6.40% 2017-27 499,735
 499,676
Senior notes - 2013 (1)
3.20% 2023 297,916
 297,683
3.20% 2023 298,519
 297,986
Euro Senior notes - 2016 (1)
1.75% 2024 555,381
 —
1.75% 2024 563,981
 512,764
Senior notes - 2017 (1)
4.38% 2047 492,877
 —
Credit facility2.67% 2019 —
 131,196
1.13% 2021 28,445
 —
Bank overdrafts and other  13,112
 10,982
  10,275
 13,599
Deferred realized gains on interest rate swaps  1,829
 3,279
  379
 1,346
  1,367,876
 1,067,722
  1,894,211
 1,325,371
Less: Current portion of long-term debt  (257,675) (132,349)
Less: Current portion of debt  (257,873) (258,516)
  $1,110,201
 $935,373
  $1,636,338
 $1,066,855
(1) Amount is net of unamortized discount and debt issuance costs.
Senior Notes
On March 14, 2016,May 18, 2017, the Company issued Euro 500.0$500.0 million face amount of 1.75%4.375% Senior Notes ("Euro Senior Notes - 2016"2017") due 20242047 at a discount of Euro 0.9$1.8 million. The Company received proceeds related to the issuance of these Euro Senior Notes - 20162017 of Euro 496.0$493.9 million which was net of the Euro 0.9$1.8 million discount and Euro 3.1$4.4 million in underwriting discountfees (recorded as deferred financing costs). In addition, the Company incurred $1.3$0.9 million of otherin legal and professional costs associated with the issuance and such costs were recorded as deferred financing costs in connection with the debt issuance.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 $3.2$5.3 million. The discount, deferred financing costs and pre-issuance hedge loss are being amortized as interest expense over the eight30 year term of the debt. The Euro Senior Notes - 20162017 bear interest at a rate of 1.75%4.375% per annum, with interest payable semi-annually on March 14June 1 and December 1 of each year, commencing on March 14,December 1, 2017. The Euro Senior Notes - 20162017 will mature on March 14, 2024.

8


June 1, 2047.
Upon 30 days’ notice to holders of the Euro Senior Notes - 2016 ,2017, the Company may redeem the Euro Senior Notes - 20162017 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 indentureIndenture governing the Euro Senior Notes - 2016.2017. However, no make-whole premium will be paid for redemptions of the Euro Senior Notes - 20162017 on or after December 14, 2023.1, 2046. The indentureIndenture 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 Euro Senior Notes - 20162017 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 Euro Senior Notes - 2016,2017, plus accrued and unpaid interest to the date of repurchase.
Commercial Paper
Commercial paper issued by the Company generally has terms of 90 days or less. As discussed in Note 11, the Euro Senior Notes - 2016 have been designatedof June 30, 2017, there was no commercial paper outstanding. The revolving credit facility is used as a hedge ofbackstop for the Company's net investment in certain subsidiaries.
Duringcommercial paper program. No commercial paper was issued during the third quarter of 2016, the Company made a final payment of $125.0 million on the Senior Notes - 2006.
Commercial Paper
During the fourth quarter of 2016, the Company issued $50 million face value of commercial paper.six months ended June 30, 2016.
Note 7. Income Taxes:
Uncertain Tax Positions
At SeptemberJune 30, 20162017, the Company had $19.617.6 million of unrecognized tax benefits recorded in Other liabilities and $4.9$5.9 million in Other current liabilities. If these unrecognized tax benefits were recognized, the effective tax rate would be affected.
At SeptemberJune 30, 20162017, the Company had accrued interest and penalties of $0.71.7 million classified in Other liabilities and $0.2$0.5 million in Other current liabilities.


As of SeptemberJune 30, 20162017, the Company’s aggregate provisions for uncertain tax positions, including interest and penalties, was $25.4$25.7 million associated with various tax positions asserted in foreign 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 20062007 to 2015.2016. 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 SeptemberJune 30, 20162017 was 20.8%22.7% compared with 25.5%23.2% for the three months ended SeptemberJune 30, 2015.2016. The quarter-over-quarter decrease was largely due to a more favorable mix of earnings and lower coststhe impact of repatriation, partiallythe global supply chain hub, offset by higher loss provisions.unfavorable repatriation costs as compared to the prior year. The effective tax rate for the ninesix months ended SeptemberJune 30, 20162017 was 22.7%19.6% compared with 22.1%23.3% for the ninesix months ended SeptemberJune 30, 2015.2016. The year-over-year increasedecrease was primarily due to various items (including 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 benefitmore favorable mix of $10.5 million recorded inearnings and the first quarterimpact of 2015, as a result of favorable tax rulings in Spain and another jurisdiction for which reserves were previously recorded and higher loss provisions in 2016, partiallythe global supply chain hub, offset by lower cost ofunfavorable repatriation incosts as compared to the 2016 period.prior year.

9


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,Three Months Ended June 30, Six Months Ended June 30,
(DOLLARS IN THOUSANDS)2016 2015 2016 20152017 2016 2017 2016
Equity-based awards$5,697
 $5,495
 $19,471
 $18,355
$7,074
 $7,844
 $12,893
 $13,774
Liability-based awards1,836
 782
 4,168
 3,355
1,298
 1,739
 3,051
 2,332
Total stock-based compensation expense7,533
 6,277
 23,639
 21,710
8,372
 9,583
 15,944
 16,106
Less: tax benefit(2,174) (1,914) (6,963) (6,326)(2,336) (2,816) (4,549) (4,789)
Total stock-based compensation expense, after tax$5,359
 $4,363
 $16,676
 $15,384
$6,036
 $6,767
 $11,395
 $11,317
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,Three Months Ended June 30, Six Months Ended June 30,
(DOLLARS IN THOUSANDS)2016 2015 2016 20152017 2016 2017 2016
Net sales:              
Flavors$366,857
 $359,103
 $1,118,869
 $1,108,689
$414,323
 $379,504
 $820,487
 $752,012
Fragrances410,144
 405,989
 1,234,921
 1,198,851
428,538
 413,974
 850,667
 824,777
Consolidated$777,001
 $765,092
 $2,353,790
 $2,307,540
$842,861
 $793,478
 $1,671,154
 $1,576,789
Segment profit:              
Flavors$77,512
 $79,803
 $259,662
 $256,546
$100,338
 $90,337
 $198,346
 $182,151
Fragrances85,010
 90,893
 261,843
 252,416
84,860
 87,596
 166,557
 176,833
Global expenses(11,405) (6,874) (37,544) (27,067)(13,398) (12,268) (29,594) (26,141)
Restructuring and other charges, net (1)
(190) —
 (473) 170
(791) (182) (10,934) (283)
Acquisition and related costs (2)
(786) (6,830) (2,035) (13,896)
Acquisition-related costs (2)
(6,278) (213) (15,066) (1,249)
Operational improvement initiative costs (3)
(802) (279) (1,901) (841)(445) (831) (1,066) (1,099)
Spanish capital tax settlement (4)
—
 —
 1,482
 —
Legal charge (5)
(25,000) —
 (25,000) —
Legal (charges) credits (4)
(1,000) 36
 (1,000) 1,482
Gain on sales of assets (5)
68
 197
 89
 2,910
Tax assessment (6)
19
 —
 (5,331) —
Integration-related costs (7)
(731) —
 (1,923) —
FDA mandated product recall (8)
(3,500) —
 (3,500) —
Operating profit124,339
 156,713
 456,034
 467,328
159,142
 164,672
 296,578
 334,604
Interest expense(13,111) (11,855) (40,649) (34,357)(17,556) (15,060) (30,363) (27,539)
Other income (expense)2,162
 (1,959) 4,952
 3,315
454
 2,438
 14,312
 (118)
Income before taxes$113,390
 $142,899
 $420,337
 $436,286
$142,040
 $152,050
 $280,527
 $306,947
 
(1)Restructuring and otherIn 2017, charges net inrepresent severance costs related to the 2017 Productivity Program. In 2016, charges relate to accelerated depreciation costs in Europewhich were recorded in Cost of goods sold.
(2)Acquisition and relatedRepresents transaction costs are associated with the 2015 acquisitions of Ottens Flavors and Lucas Meyer as discussed in Note 3, including inventory step-up charges related to the inventory acquired for Lucas Meyeracquisitions 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 David MichaelLucas Meyer in 2016.the 2016 period.

10


(3)Operational improvement initiative costs relate to accelerated depreciation, dismantling and severance costs in Asia in the 2016 period andRepresents accelerated depreciation in Hangzhou, China in both the 2015 period.2017 and 2016 periods.
(4)The Spanish capital taxRepresents additional charges related to litigation settlement represents interest receivedin 2017 and income receivable from the Spanish government related to the reversal of the unfavorable ruling the Spanish capital tax case from 2002, which was reversed during the year ended December 31, 2015.in 2016.
(5)The legal charge relatesRepresents 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 reserve recorded forintegration of the ZoomEssence caseDavid Michael and Fragrance Resources acquisitions in the 2017 period.
(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 13.13, 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 SeptemberJune 30, 20162017 and 20152016 were $190244 million and $182$185 million, respectively and for the ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 were $555$449 million and $520$365 million, respectively. Net sales attributed to all foreign countries in total for the three months ended SeptemberJune 30, 2017 and 2016 and 2015 were $587$599 million and $583$608 million, respectively and for the ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 were $1,799$1,222 million and $1,788$1,212 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. PlansThree Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(DOLLARS IN THOUSANDS)2016 2015 2016 20152017 2016 2017 2016
Service cost for benefits earned$771
 $984
 $2,314
 $2,952
$698
 $772
 $1,395
 $1,543
Interest cost on projected benefit obligation6,007
 5,954
 18,020
 17,860
4,561
 6,006
 9,122
 12,013
Expected return on plan assets(8,069) (8,083) (24,208) (24,248)(9,246) (8,070) (18,492) (16,139)
Net amortization and deferrals1,387
 5,203
 4,159
 15,607
1,793
 1,385
 3,585
 2,772
Net periodic benefit cost96
 4,058
 285
 12,171
(2,194) 93
 (4,390) 189
Defined contribution and other retirement plans1,211
 1,847
 5,823
 6,075
2,524
 2,211
 4,779
 4,612
Total expense$1,307
 $5,905
 $6,108
 $18,246
$330
 $2,304
 $389
 $4,801
              
Non-U.S. PlansThree Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(DOLLARS IN THOUSANDS)2016 2015 2016 20152017 2016 2017 2016
Service cost for benefits earned$3,863
 $4,220
 $11,443
 $12,659
$5,610
 $3,863
 $11,220
 $7,638
Interest cost on projected benefit obligation6,372
 6,283
 18,890
 18,848
3,911
 6,372
 7,822
 12,737
Expected return on plan assets(11,985) (12,712) (35,526) (38,137)(12,334) (11,985) (24,668) (23,934)
Net amortization and deferrals3,286
 3,397
 9,738
 10,189
3,988
 3,286
 7,977
 6,550
Net periodic benefit cost1,536
 1,188
 4,545
 3,559
1,175
 1,536
 2,351
 2,991
Defined contribution and other retirement plans1,705
 1,923
 5,175
 5,211
1,616
 1,763
 2,913
 3,470
Total expense$3,241
 $3,111
 $9,720
 $8,770
$2,791
 $3,299
 $5,264
 $6,461
The Company expects to contribute a total of approximately $30 million to its non-U.S. pension plans and $20$2 - $10 million to its U.S. pension plans during 2016.2017. During the ninesix months ended SeptemberJune 30, 2016, $20.0 million of2017, no contributions were made to the qualified U.S. pension plans, $21.1$29.3 million of contributions were made to the non-U.S. pension plans and $3.7$2.2 million of benefit payments were made with respect to the Company's non-qualified U.S. pension plan.

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,Three Months Ended June 30, Six Months Ended June 30,
(DOLLARS IN THOUSANDS)2016 2015 2016 20152017 2016 2017 2016
Service cost for benefits earned$214
 $301
 $644
 $901
$221
 $214
 $442
 $429
Interest cost on projected benefit obligation787
 1,082
 2,360
 3,246
588
 787
 1,176
 1,574
Net amortization and deferrals(1,355) (712) (4,065) (2,134)(1,046) (1,355) (2,092) (2,710)
Total postretirement benefit (income) expense$(354) $671
 $(1,061) $2,013
Total postretirement benefit income$(237) $(354) $(474) $(707)
The Company expects to contribute approximately $5 million to its postretirement benefits other than pension plans during 20162017. In the ninesix months ended SeptemberJune 30, 20162017, $3.7$2.2 million of contributions were made.


11


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 13 of our 20152016 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 SeptemberJune 30, 20162017.

The amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at SeptemberJune 30, 20162017 and December 31, 20152016 consisted of the following: 
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
(DOLLARS IN THOUSANDS)Carrying
Amount		 Fair
Value		 Carrying
Amount		 Fair
Value		Carrying
Amount		 Fair
Value		 Carrying
Amount		 Fair
Value
Cash and cash equivalents (1)
$498,730
 $498,730
 $181,988
 $181,988
$491,386
 $491,386
 $323,992
 $323,992
Credit facilities and bank overdrafts (2)
13,112
 13,112
 142,178
 142,178
38,720
 38,720
 13,599
 13,599
Long-term debt: (3)
              
Senior notes - 2006—
 —
 124,964
 127,717
Senior notes - 2007499,638
 577,132
 499,618
 563,855
499,735
 551,713
 499,676
 556,222
Senior notes - 2013297,916
 316,742
 297,683
 290,830
298,519
 306,361
 297,986
 302,376
Euro Senior notes - 2016555,381
 604,035
 —
 —
563,981
 611,397
 512,764
 546,006
Senior notes - 2017492,877
 511,789
 —
 —
 
(1)The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those instruments.
(2)The carrying amount of our credit facilities, and bank overdrafts 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 ninesix months ended SeptemberJune 30, 20162017 and the year ended December 31, 20152016, 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

12


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. TwelveTen of these forward currency contracts matured during the ninesix months ended SeptemberJune 30, 2016.2017.

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 ninesix months ended SeptemberJune 30, 20162017 and the year ended December 31, 20152016, 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.
During 2015 and 2014, theThe 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 ninesix months ended SeptemberJune 30, 2016.2017.
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 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 as discussed in Note 6.
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 SeptemberJune 30, 20162017 and December 31, 20152016: 
(DOLLARS IN THOUSANDS)September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
Foreign currency contracts$881,600
 $573,200
$687,437
 $527,500
Interest rate swaps$350,000
 $475,000
350,000
 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 SeptemberJune 30, 20162017 and December 31, 20152016: 
September 30, 2016June 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		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$2,411
 $4,210
 $6,621
$927
 $8,055
 $8,982
Interest rate swaps2,326
 —
 2,326
$4,737
 $4,210
 $8,947
$927
 $8,055
 $8,982
Derivative liabilities (b)
          
Foreign currency contracts$1,588
 $5,851
 $7,439
$7,020
 $8,852
 $15,872
Interest rate swaps158
 —
 158
$1,588
 $5,851
 $7,439
$7,178
 $8,852
 $16,030

13


December 31, 2015December 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		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$6,560
 $3,700
 $10,260
$13,765
 $7,737
 $21,502
Interest rate swaps1,210
 —
 1,210
335
 —
 335
$7,770
 $3,700
 $11,470
$14,100
 $7,737
 $21,837
Derivative liabilities (b)
          
Foreign currency contracts$2,106
 $3,022
 $5,128
$46
 $2,209
 $2,255
Interest rate swaps725
 —
 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 ninesix months ended SeptemberJune 30, 20162017 and 20152016 (in thousands): 

Derivatives Not Designated as Hedging InstrumentsAmount of Gain (Loss)
Recognized in Income on
Derivative		 
Location of Gain (Loss)
Recognized in Income
on Derivative
Amount of Gain (Loss)
Recognized in Income on
Derivative		 
Location of Gain (Loss)
Recognized in Income
on Derivative
Three Months Ended September 30, Three Months Ended June 30, 
2016 2015  2017 2016  
Foreign currency contracts$(3,313) $(1,979) Other (income) expense, net$(3,054) $1,395
 Other (income) expense, net
Derivatives Not Designated as Hedging InstrumentsAmount of Gain (Loss)
Recognized in Income on
Derivative		 
Location of Gain (Loss)
Recognized in Income
on Derivative
Amount of Gain (Loss)
Recognized in Income on
Derivative		 
Location of Gain (Loss)
Recognized in Income
on Derivative
Nine Months Ended September 30, Six Months Ended June 30, 
2016 2015  2017 2016  
Foreign currency contracts$(6,860) $8,097
 Other (income) expense, net$(13,181) $(3,548) 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 in the Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 (in thousands): 

14


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)
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,Three Months Ended June 30,   Three Months Ended June 30,
2016 2015   2016 20152017 2016   2017 2016
Derivatives in Cash Flow Hedging Relationships:              
Foreign currency contracts$98
 $(7,794) Cost of goods sold $(544) $6,956
$(6,328) $612
 Cost of goods sold $1,789
 $2,736
Interest rate swaps (1)
171
 (4,703) Interest expense (171) (69)(5,439) 171
 Interest expense (186) (171)
Derivatives in Net Investment Hedging Relationships:              
Foreign currency contracts(224) (547) N/A —
 —
(2,082) 1,934
 N/A —
 —
Euro Senior notes - 2016(2,856) —
 N/A —
 —
(19,780) 9,649
 N/A —
 —
Total$(2,811) $(13,044) $(715) $6,887
$(33,629) $12,366
 $1,603
 $2,565
              
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)
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,Six Months Ended June 30,   Six Months Ended June 30,
2016 2015   2016 20152017 2016   2017 2016
Derivatives in Cash Flow Hedging Relationships:              
Foreign currency contracts$(6,293) $(1,815) Cost of goods sold $4,808
 $11,540
$(9,276) $(6,391) Cost of goods sold $2,247
 $5,352
Interest rate swaps (1)
(2,830) (4,565) Interest expense (428) (207)(4,243) (3,001) Interest expense (357) (257)


   

         
Derivatives in Net Investment Hedging Relationships:              
Foreign currency contracts(694) 2,984
 N/A —
 —
(3,128) (470) N/A —
 —
Euro Senior notes - 20166,793
 —
 N/A —
 —
(31,189) 9,649
 N/A —
 —
Total$(3,024) $(3,396) $4,380
 $11,333
$(47,836) $(213) $1,890
 $5,095
 
(1) Interest rate swaps were entered into as pre-issuance hedges.

No ineffectiveness was experienced in the above noted cash flow or net investment hedges during the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016.
The Company expects that approximately $0.6$2.9 million (net of tax) of derivative gains included in AOCI at SeptemberJune 30, 20162017, based on current market rates, will be reclassified into earnings within the next 12 months. The majority of this amount will vary due to fluctuations in foreign currency exchange rates.

15








Note 12. Accumulated Other Comprehensive Income (Loss):
The following tables present changes in the accumulated balances for each component of other comprehensive income, including current period other comprehensive income and reclassifications out of accumulated other comprehensive income:
Foreign
Currency
Translation
Adjustments
 
(Losses) Gains on
Derivatives
Qualifying as
Hedges
 
Pension and
Postretirement
Liability
Adjustment
 Total
Foreign
Currency
Translation
Adjustments
 
(Losses) Gains on
Derivatives
Qualifying as
Hedges
 
Pension and
Postretirement
Liability
Adjustment
 Total
(DOLLARS IN THOUSANDS)              
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2015$(297,499) $9,401
 $(325,342) $(613,440)
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2016$(352,025) $7,604
 $(335,674) $(680,095)
OCI before reclassifications3,198
 (4,744) —
 (1,546)22,304
 (11,629) —
 10,675
Amounts reclassified from AOCI—
 (4,380) 7,719
 3,339
(12,214) (1,890) 7,323
 (6,781)
Net current period other comprehensive income (loss)3,198
 (9,124) 7,719
 1,793
10,090
 (13,519) 7,323
 3,894
Accumulated other comprehensive (loss) income, net of tax, as of September 30, 2016$(294,301) $277
 $(317,623) $(611,647)
Accumulated other comprehensive (loss) income, net of tax, as of June 30, 2017$(341,935) $(5,915) $(328,351) $(676,201)
 
Foreign
Currency
Translation
Adjustments
 
(Losses) Gains on
Derivatives
Qualifying as
Hedges
 
Pension and
Postretirement
Liability
Adjustment
 Total
Foreign
Currency
Translation
Adjustments
 
(Losses) Gains on
Derivatives
Qualifying as
Hedges
 
Pension and
Postretirement
Liability
Adjustment
 Total
(DOLLARS IN THOUSANDS)              
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2014$(173,342) $12,371
 $(379,459) $(540,430)
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2015$(297,499) $9,401
 $(325,342) $(613,440)
OCI before reclassifications(81,326) 4,952
 —
 (76,374)9,389
 (4,297) —
 5,092
Amounts reclassified from AOCI—
 (11,333) 16,501
 5,168
—
 (5,095) 5,133
 38
Net current period other comprehensive income (loss)(81,326) (6,381) 16,501
 (71,206)9,389
 (9,392) 5,133
 5,130
Accumulated other comprehensive (loss) income, net of tax, as of September 30, 2015$(254,668) $5,990
 $(362,958) $(611,636)
Accumulated other comprehensive (loss) income, net of tax, as of June 30, 2016$(288,110) $9
 $(320,209) $(608,310)

The following table provides details about reclassifications out of accumulated other comprehensive income to the Consolidated Statement of Comprehensive Income: 
Nine Months Ended September 30, 2016 Nine Months Ended September 30, 2015 Affected Line Item in the
Consolidated Statement
of Comprehensive  Income		Six Months Ended June 30, 2017 Six Months Ended June 30, 2016 Affected Line Item in the
Consolidated Statement
of Comprehensive  Income
(DOLLARS IN THOUSANDS)          
(Losses) gains on derivatives qualifying as hedges        
Foreign currency contracts$5,495
 $13,189
 Cost of goods sold$2,568
 $6,117
 Cost of goods sold
Interest rate swaps(428) (207) Interest expense(357) (257) Interest expense
(687) (1,649) Provision for income taxes(321) (765) Provision for income taxes
$4,380
 $11,333
 Total, net of income taxes$1,890
 $5,095
 Total, net of income taxes
(Losses) gains on pension and postretirement liability adjustments        
Prior service cost$5,602
 $3,472
 
(a) 
$(3,512) $3,735
 
(a) 
Actuarial losses(15,434) (27,134) 
(a) 
(12,982) (10,347) 
(a) 
2,113
 7,161
 Provision for income taxes9,171
 1,479
 Provision for income taxes
$(7,719) $(16,501) Total, net of income taxes$(7,323) $(5,133) Total, net of income taxes
 
(a)The amortization of prior service cost and actuarial loss is included in the computation of net periodic benefit cost. Refer to Note 14 of our 20152016 Form 10-K for additional information regarding net periodic benefit cost.


16


Note 13. Commitments and Contingencies:
Guarantees and Letters of Credit
The Company has various bank guarantees and letters of credit which are available for use to support its ongoing business operations and to satisfy governmental requirements associated with pending litigation in various jurisdictions.
At SeptemberJune 30, 20162017, we had total bank guarantees and standby letters of credit of approximately $39.237.1 million with various financial institutions. Included in the above aggregate amount is a total of $16.2$15.9 million in bank guarantees which the Company has posted for certain assessments in Brazil for other diverse income tax and indirect tax disputes related to fiscal years 1998-2011. There were no material amounts utilized under the standby letters of credit as of SeptemberJune 30, 20162017.
In order to challenge the assessments in these cases in Brazil, the Company has been required to, and has separately pledged assets, principally property, plant and equipment, to cover assessments in the amount of approximately $13.5$15.2 million as of SeptemberJune 30, 2016.2017.
Lines of Credit
The Company has various lines of credit which are available to support its ongoing business operations. At SeptemberJune 30, 20162017, we had available lines of credit (in addition to the $950$921.6 million of capacity under the Credit Facility discussed in Note 89 of our 20152016 Form 10-K) of approximately $76.975.0 million with various financial institutions. There were no significant amounts drawn down pursuant to these lines of credit as of SeptemberJune 30, 20162017.
Litigation
The Company assesses contingencies related to litigation and/or other matters to determine the degree of probability and range of possible loss. A loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly sensitive and requires judgments about future events. On at least a quarterly basis, the Company reviews contingencies related to litigation to determine the adequacy of accruals. The amount of ultimate loss may differ from these estimates and further events may require the Company to increase or decrease the amounts it has accrued on any matter.
Periodically, we assess our insurance coverage for all known claims, where applicable, taking into account aggregate coverage by occurrence, limits of coverage, self-insured retentions and deductibles, historical claims experience and claims experience with our insurance carriers. The liabilities are recorded at management’s best estimate of the probable outcome of the lawsuits and claims, taking into consideration the facts and circumstances of the individual matters as well as past experience on similar matters. At each balance sheet date, the key issues that management assesses are whether it is probable that a loss as to asserted or unasserted claims has been incurred and if so, whether the amount of loss can be reasonably estimated. We record the expected liability with respect to claims in Other liabilities and expected recoveries from our insurance carriers in Other assets. We recognize a receivable when we believe that realization of the insurance receivable is probable under the terms of the insurance policies and our payment experience to date.
Environmental
Over the past 20 years, various federal and state authorities and private parties have claimed that we are a Potentially Responsible Party (“PRP”) as a generator of waste materials for alleged pollution at a number of waste sites operated by third parties located principally in New Jersey and have sought to recover costs incurred and to be incurred to clean up the sites.
We have been identified as a PRP at eight facilities operated by third parties at which investigation and/or remediation activities may be ongoing. We analyze our potential liability on at least a quarterly basis. We accrue for environmental liabilities when they are probable and estimable. We estimate our share of the total future cost for these sites to be less than $5 million.

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


17


China Facilities
Guangzhou Flavors plant
During 2015, the Company was notified by Chinese authorities of compliance issues pertaining to the emission of odors from several of its plants in China. As a result, the Company's Guangzhou Flavors facilityplant in China was temporarily idled. Accordingly, theThe Company invested approximately $6.5has made additional capital improvements in odor-abatement equipment at these facilitiesplants to address these issues and is in the process of building a second Flavors siteplant in China, which is expected to begin operating in the first quarter of 2019.
During the fourth quarter of 2016, the Company was notified that certain governmental authorities have begun to evaluate a change in the zoning of the Guangzhou Flavors plant. The zoning, if changed, would prevent the Company from continuing to manufacture product at the existing plant. The ultimate outcome of any change that the governmental authorities may propose, the timing of such a change and the nature of any compensation arrangements that might be completed during 2018. provided to the Company are uncertain.
The net book value of the existing site approximates $73 million.plant was approximately $67 million as of June 30, 2017.
Zhejiang Ingredients plant
The Company has received a request from the Chinese government to relocate its Fragrance Ingredients plant in Zhejiang, China. The Company is in discussions with the government regarding the timing of the requested relocation and the amount and nature of government compensation to be provided to the Company. The Company expects to conclude discussions with the Government in 2017. The net book value of the current site approximates $27 million.plant was approximately $25 million as of June 30, 2017. Depending upon the ultimate outcome of thesethe discussions with the Chinese government, between $0-27$0-25 million of the remaining net book value may be subject to accelerated depreciation.
Total China Operations
The total carrying value of our five facilitiessix existing plants in China (one(two of which isare currently under construction) was approximately $130$139 million as of SeptemberJune 30, 2016.2017.
If the Company is required to close a plant, or operate one at significantly reduced production levels on a permanent basis, the Company may be required to record charges that could have a material impact on its consolidated financial results of operations, financial position and cash flows in future periods.
Other Contingencies
The Company has contingencies involving third parties (such as labor, contract, technology or product-related claims or litigation) as well as government-related items in various jurisdictions in which we operate pertaining to such items as value-added taxes, other indirect taxes, customs and duties and sales and use taxes. It is possible that cash flows or results of operations, in any period, could be materially affected by the unfavorable resolution of one or more of these contingencies.
The most significant government-related contingencies exist in Brazil. With regard to the Brazilian matters, we believe we have valid defenses for the underlying positions under dispute; however, in order to pursue these defenses, we are required to, and have provided, bank guarantees and pledged assets in the aggregate amount of $29.7$31.1 million. The Brazilian matters take an extended period of time to proceed through the judicial process and there are a limited number of rulings to date.
InAs previously disclosed, in March 2012, ZoomEssence, Inc. filed a complaint against the Company in the U.S. District Court for the District of New Jersey alleging trade secret misappropriation, breach of contract and unjust enrichment in connection with certain spray dry technology disclosed to the Company. ZoomEssence is seekingsought an injunction and monetary damages. ZoomEssence initially sought a temporary restraining order and preliminary injunction, but the Court denied these applications in an order entered on September 27, 2013, finding that ZoomEssence had not demonstrated a likelihood of success on the merits of its claims. OnIn November 3, 2014, ZoomEssence amended its complaint against the Company to include allegations of breach of the duty of good faith and fair dealing, fraud in the inducement, and misappropriation of confidential and proprietary information. On November 13, 2014, the Company filed a counterclaim against ZoomEssence alleging trade secret misappropriation, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, misappropriation of confidential and proprietary information, common law unfair competition, tortious interference with contractual relations, and conversion. During the thirdsecond quarter of 2016,2017, the Court stayedCompany and ZoomEssence mutually agreed to settle all claims and counterclaims. The parties agreed to dismiss their claims against one another, with prejudice and without any admission of liability or wrongful conduct, to avoid any further expense and disruption from the caselitigation. The complaint was dismissed, with prejudice, on July 5, 2017. Under the settlement agreement, the Company made a one-time payment to ZoomEssence of $56 million during the second quarter of 2017 and directed the parties to engage in mediation. The mediation, which took place in October 2016, did not result in a resolution of the litigation; we cannot reliably predict the timing of a trial, but it is expected that it would take place in 2017. Based on information available and expert assessment of potential exposure,exchanged full mutual releases. Accordingly, the Company recorded an additional reservecharge of $25$1 million during the three months ended Septembersecond quarter of 2017.
The Company periodically incurs product liability claims based on product that is sold to customers that may be defective or otherwise not in accordance with the customer’s requirements. As previously disclosed, in the first quarter of 2017, the Company was made aware of a claim for product that was subject to a product recall. As of June 30, 2016.2017, the Company had recorded a total charge of approximately $5.3 million with respect to this claim. In addition to the charge of $1.8 million recorded in the first quarter of 2017, an additional $3.5 million was recorded during the second quarter of 2017. The second


quarter charge reflects additional information on specific volumes of affected products, which information became available in the second quarter of 2017. This amount principally represents an accrual for the claim based on management's best estimate of volumes of customer products subject to the recall. Additionally, appropriate reserves have been established for all remaining inventory at the Company's manufacturing site. While it is probable that the Company will incur additional losses related to this claim, the amount of the ultimate claim that will be paid is not currently estimable as the following information is not yet available: details as to the amount of product that will ultimately be returned and the customer’s direct manufacturing and other production costs; costs related to the customer’s recall efforts; costs to dispose of defective product; and other claims that the customer may make. While it is not currently possible to estimate the amount of losses, such losses when recorded will affect income from operations in future individual quarters. The Company does not believe that the ultimate settlement of the claim will have a material impact on its financial condition. Separately, the Company expects to pursue reimbursement of all or a portion of costs, once incurred, from insurance and/or the supplier; however, the nature, timing and amount of any such reimbursement cannot be determined at this time.
The Company determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that either a loss is reasonably possible or a loss in excess of accrued amounts is reasonably possible and the amount of losses or range of losses is determinable. For all third party contingencies (including labor, contract, technology, tax, product-related claims and business litigation), the Company currently estimates that the aggregate range of reasonably possible estimable losses in excess of any accrued liabilities is $0 to approximately $53$8 million. The estimates included in this amount are based on the Company’s analysis of currently available information and, as new information is obtained, these estimates may change. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent

18


the ultimate loss to the Company from the matters in question. Thus, the Company’s exposure and ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued or the range disclosed above.
Separately, the Spanish tax authorities alleged claims forWe are also a capital tax and the Appellate Court rejected one of the two bases upon which we based our capital tax position. On January 22, 2014, we filed an appeal and in orderparty to avoid future interest costsother litigation arising in the eventordinary course of our appeal was unsuccessful, we paid Euro 9.8 million ($11.2 million, representingbusiness. We do not expect the principal amount) duringoutcome of these cases, singly or in the first quarter of 2014. On February 24, 2016, we receivedaggregate, to have a favorable rulingmaterial effect on our appeal from the Spanish Supreme Court which overruled a lower court ruling. As a result of this decision, we reversed the previously recorded provision of Euro 9.8 million ($10.5 million) for the year ended December 31, 2015. During 2016, we recorded additional income of $2.3 million related to the finalization of amounts received from the authorities. This amount has principally been reflected as a reduction of administrative expense.

Note 14. Subsequent Events:

On November 3, 2016, the Company entered into an agreement to acquire Fragrance Resources, a privately-held fragrance company with facilities in Germany, North America, France, and China. The transaction is expected to close in 2017.consolidated financial condition.
 


19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Company background
We create, manufactureare a leading innovator of sensorial experiences, co-creating unique products that consumers taste, smell, or feel in fine fragrances and supply flavors and fragrances (including cosmetic active ingredients) that are used in the food, beverage, personal carecosmetics, detergents and household products industries eithergoods, and food and beverages. We take advantage of our capabilities in the form of compounds or individual ingredients, including cosmetic active ingredients. Our flavorsconsumer insights, research and fragrance compounds combine a number of ingredientsproduct development (“R&D”), creative expertise and customer intimacy to partner with our customers in developing innovative and differentiated offerings for consumers. We believe that are blended, mixed or reacted together to produce proprietary formulas created bythis collaborative approach will generate market share gains for our flavoristscustomers. We operate in two business segments, Flavors and perfumers.Fragrances.
Flavors are the key building blocks that impart taste experiences in food and beverage products and, as such, play a significant role in determining consumer preference offor the end products in which they are used. As a leading creator of flavors, we help our customers deliver on the promise of delicious and healthy foods and drinks that appeal to consumers. While we are a global leader, our flavors business is more regional in nature, with different formulas that reflect local taste preferences. Our flavors compounds are ultimately used by our customers in four end-use categories: (1) Savory, (2) Beverages, (3) Sweet and (4) Dairy.
We are a global leader in the creation of fragrance compounds that are integral elements in the world’s finest perfumes and best-known consumer products, within fabric care, home care, personal wash, hair care and toiletries products. Our Fragrances business consists of Fragrance Compounds and Fragrance Ingredients. Our Fragrance Compounds are definedorganized into two broad categories, (1) Fine Fragrances and (2) Consumer Fragrances. Consumer Fragrances consists of five end-use categories of products: (1) Fabric Care, (2) Home Care, (3) Personal Wash, (4) Hair Care and (5) Toiletries. In addition, Fragrance Ingredients, which areAlso included in the Fragrances business unit consistare Fragrance Ingredients, consisting of cosmetic active and functional ingredients thatingredients. Fragrance Ingredients are used internally and sold to third parties, including customers and competitors, for use in preparation of compounds, and cosmetic active ingredients.compounds.
The flavors and fragrances market is part of a larger market which supplies a wide variety of ingredients and compounds that are used in consumer products. The broader market includes large multinationalmulti-national companies orand smaller regional and local participants whichthat supply products such as seasonings, texturizers, spices, enzymes, certain food-related commodities, fortified products and cosmetic active ingredients. The global market for flavors and fragrances has expanded consistently, primarily as a result of an increase in demand for, as well as an increase in the variety of, consumer products containing flavors and fragrances. In 2014,2016, the flavors, fragrances and fragrancescosmetic actives and functional ingredients market, in which we compete, was estimated by management to be at least $18approximately $20.0 billion and is forecasted to grow to approximately $21.6 billion2-3% by 2019,2020, primarily driven by expected growth in emerging markets; however the exact size of the global market is not available due to fragmentation of data. We estimate the market size for cosmetic active ingredients to be approximately $1.5 billion as of 2015. We, together with the other top three companies, are estimated to represent approximately two-thirds of the total estimated sales in the global flavors and fragrances sub-segment of the broader market.
Development of new flavors and fragrance compounds is driven by a variety of sources, including requests from our customers, who are in need of a specific flavor or fragrance for use in a new or modified consumer product, or as a result of internal initiatives stemming from our consumer insights program. Our product development team works in partnership with our scientists and researchers to optimize the consumer appeal of the flavor or fragrance. It then becomes a collaborative process between our researchers, our product development team and our customers to perfect the flavor or fragrance so that it is ready to be included in the final consumer product.
On OctoberApril 7, 2016, the Company2017, we completed the acquisition of 100%Columbia PhytoTechnology, LLC d/b/a PowderPure ("PowderPure"), a processor of the outstanding shares of David Michael & Company, Inc. ("David Michael")all-natural food ingredients, for approximately $242$55.0 million. The purchase price was funded from existing resources. David Michael was acquired to strengthen the North American flavors business.resources including drawdown on our credit facility and proceeds from commercial paper. This acquisition will bewas accounted for as a business combination and is not expected to have a material impact on the consolidated statementConsolidated Statement of comprehensive incomeComprehensive Income for 2016.2017.
During the second quarter of 2015,On January 17, 2017, we completed the acquisition of Ottens Flavors,Fragrance Resources, a creator of specialty fine fragrances, for approximately Euro 142.0 million (approximately $150.5 million). The purchase price was funded from existing resources including drawdown on our credit facility and proceeds from commercial paper. The acquisition strengthened our fragrances market position in the third quarter of 2015, we completed theNorth America and Germany. This acquisition of Lucas Meyer. The acquisitions didwas accounted for as a business combination and is not expected to have a material impact on our consolidated statementthe Consolidated Statement of comprehensive income either individually or in aggregate.Comprehensive Income for 2017.
2016




2017 Overview
Net sales during the thirdsecond quarter of 20162017 increased 2%6% on a reported basis and 3%8% on a currency neutral basis (which excludes the effects of changes in currency), versus the 2016 period, with the effect of the Lucas Meyer acquisitionacquisitions contributing approximately 1%6% to both reported and currency neutral basis growth rates. The currency neutralSales growth, of 3%excluding acquisitions, reflects new win performance (net of losses) in Flavors and Fragrance Compounds in addition to strong growth drivenpartially offset by the impact of acquisitions in Fragrance Ingredients and lower volume erosiondeclines on existing business in Flavors.both Flavors and Fragrances.
Exchange rate fluctuations had a 100200 basis point (bps) unfavorable impact on net sales for the thirdsecond quarter, due to the strengthening of the U.S. dollar. The effect of exchange rates can vary by business and region, depending upon the mix of sales by destination country as well as the relative percentage of local sales priced in U.S. dollars versus local currencies.
Gross margins decreased year-over-year to 44.6%44.4% in the thirdsecond quarter of 20162017 from 45.4%46.1% in the 20152016 period, driven primarily by unfavorable mix, manufacturing performanceprice versus input costs and input costsweaker sales mix which were only partially offset by cost savings and

20


productivity initiatives.initiatives and the impact of acquisitions. Included in the thirdsecond quarter of 2016 was2017 were $9.6 million of acquisition-related amortization of inventory "step-up" costs, costs associated with product recalls, operational improvement initiative and integration-related costs compared to $1.0 million of restructuring costs and operational improvement initiative costs, compared to $2.7 million of costs associated with acquisition-related and operational improvement initiativerestructuring costs included in the thirdsecond quarter of 2015.2016. Excluding these items, gross margin decreased 10060 bps compared to the prior year period. The overall raw material cost base continues to be essentially benign.relatively stable, but upward trending. We believe that we will continue to see higher prices in 2017 on certain categories (such as naturals including vanilla) that will be largely offset by benefits associated withvanilla and citrus) and to a lesser extent oil-based derivatives that are expected to continue in 2016.derivatives. We continue to seek improvements in our margins through operational performance, cost reduction efforts and mix enhancement.
FINANCIAL PERFORMANCE OVERVIEW
Sales
Reported sales in the thirdsecond quarter of 20162017 increased approximately 2%6%. In currency neutral terms, sales increased 3%, reflecting new win performance in both Flavors and Fragrance Compounds, lower volume erosion on existing business in Flavors and the effect of the Lucas Meyer acquisition (which added approximately 1% to both reported and currency neutral basis amounts) in Fragrance Ingredients. We continuecontinued to benefit from our diverse portfolio of end-use product categories and geographies and had currency neutral growth in three of our four regions and all four of our Flavors end-use product categories. Flavors realized currency neutralSales growth of 3% for the third quarter of 2016, whichexcluding acquisitions was driven by new win performance and lowerpartially offset by volume erosiondeclines on existing business. Our Fragrance business in both Flavors and Fragrances. Flavors achieved reported sales growth of 9% and currency neutral growth of 2%11%, driven primarily by strongwith the effect of acquisitions contributing approximately 7% to both reported and currency neutral growth withinrates. Fragrances achieved reported sales growth of 4% and currency neutral sales growth of 5%, with the effect of acquisitions contributing approximately 4% to both reported and currency neutral growth rates. Additionally, Fragrance Ingredients which was driven entirely by the inclusion of acquisitions.sales were up 7% on a reported basis and 9% on a currency neutral basis. Overall, our thirdsecond quarter 20162017 results include 5%reflected flat sales growth from emerging markets and 2%3% growth from developed markets which each represented 49% and 51%50% of currency neutral sales, respectively.total sales. From a geographic perspective, for the thirdsecond quarter of 2017, North America (NOAM), Europe, Africa and the Middle East (EAME) and Latin America (LA) all delivered sales growth, led by NOAM with 19%. Greater Asia (GA) all delivered currency neutral growth in 2016, led by GA with 7%. Latin America (LA) sales declined 4% on a currency neutral basis.3%.
Operating profit
Operating profit decreased $32.3$5.5 million to $124.3$159.1 million (16.0%(18.9% of sales) in the 2016 third2017 second quarter compared to $156.7$164.7 million (20.5%(20.8% of sales) in the comparable 20152016 period. The thirdsecond quarter of 20162017 included $26.8$12.7 million of acquisition-related costs, costs associated with product recalls, legal charges, acquisition-related, operational improvement initiative and restructuring, costs compared to $7.1 million of acquisition-relatedintegration-related and operational improvement initiative costs as well as gains on sales of fixed assets compared to $1.0 million of acquisition-related, restructuring and operational improvement initiative costs which were partially offset by gains on sales of fixed assets and a favorable legal settlement in the prior year period. Excluding these charges, adjusted operating profit was $151.1$171.8 million (19.4%(20.4% of sales) for the thirdsecond quarter of 2016, a decrease2017, an increase from $163.8$165.7 million (21.4%(20.9% of sales) for the thirdsecond quarter of 2015.2016. Foreign currency changes had a 4%2.5% unfavorable impact on operating profit in the 2017 period compared to no impact on operating profit in the 2016 period compared to an unfavorable impact on operating profit of approximately 3% inversus the 2015 period versus the 2014 period.
Other (income) expense, net
Other (income) expense, net increased $4.2decreased $2.0 million to $2.2$0.5 million of income in the thirdsecond quarter of 20162017 compared to $2.0$2.4 million of expenseincome in the thirdsecond quarter of 2015.2016. The year-over-year increase isdecrease was primarily driven by favorableunfavorable year-over-year foreign exchange gainsgains/(losses) in 2016.2017.
Net income
Net income decreased by $16.7$6.9 million quarter-over-quarter to $89.8$109.8 million for the thirdsecond quarter of 2016,2017, driven by the factors discussed above.



Cash flows
Cash flows from operations for the ninesix months ended SeptemberJune 30, 20162017 were $329.4$57.9 million or 14.0%7.0% of sales, compared to cash inflow from operations of $294.7$172.3 million or 12.8%22.0% of sales for the ninesix months ended SeptemberJune 30, 2015.2016. The increasedecrease in cash flows from operations in 20162017 was principally driven by payment of a litigation settlement of $56 million (as discussed in Note 13 to the Consolidated Financial Statements), lower pension contributionsnet income and lower core working capital requirements (trade receivables, inventories and accounts payable)higher incentive compensation payments for the 20162017 period as compared to the 20152016 period.






21


Results of Operations  
Three Months Ended September 30,   Nine Months Ended September 30,  Three Months Ended June 30,   Six Months Ended June 30,  
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
2016 2015 Change 2016 2015 Change2017 2016 Change 2017 2016 Change
Net sales$777,001
 $765,092
 2 % $2,353,790
 $2,307,540
 2 %$842,861
 $793,478
 6 % $1,671,154
 $1,576,789
 6 %
Cost of goods sold430,733
 417,966
 3 % 1,281,673
 1,269,097
 1 %468,272
 427,837
 9 % 931,899
 850,940
 10 %
Gross profit346,268
 347,126
   1,072,117
 1,038,443
  374,589
 365,641
   739,255
 725,849
  
Research and development (R&D) expenses64,415
 62,750
 3 % 191,052
 188,725
 1 %70,320
 63,252
 11 % 140,031
 126,637
 11 %
Selling and administrative (S&A) expenses152,046
 122,249
 24 % 408,372
 372,267
 10 %135,910
 132,784
 2 % 276,240
 256,327
 8 %
Amortization of acquisition-related intangibles5,468
 5,414
 1 % 16,659
 10,293
 62 %8,494
 5,130
 66 % 15,561
 11,191
 39 %
Restructuring and other charges, net—
 —
 — % —
 (170) (100)%791
 —
 100 % 10,934
 —
 100 %
Gain on sales of fixed assets(68) (197) (65)% (89) (2,910) (97)%
Operating profit124,339
 156,713
   456,034
 467,328
  159,142
 164,672
   296,578
 334,604
  
Interest expense13,111
 11,855
 11 % 40,649
 34,357
 18 %17,556
 15,060
 17 % 30,363
 27,539
 10 %
Other (income) expense(2,162) 1,959
 (210)% (4,952) (3,315) 49 %(454) (2,438) (81)% (14,312) 118
 (12,229)%
Income before taxes113,390
 142,899
   420,337
 436,286
  142,040
 152,050
   280,527
 306,947
  
Taxes on income23,613
 36,452
 (35)% 95,223
 96,206
 (1)%32,245
 35,317
 (9)% 54,968
 71,610
 (23)%
Net income$89,777
 $106,447
 (16)% $325,114
 $340,080
 (4)%$109,795
 $116,733
 (6)% $225,559
 $235,337
 (4)%
Diluted EPS$1.12
 $1.31
 (15)% $4.05
 $4.18
 (3)%$1.38
 $1.46
 (5)% $2.84
 $2.93
 (3)%
Gross margin44.6% 45.4% (80) 45.5% 45.0% 50
44.4% 46.1% (170) 44.2% 46.0% (180)
R&D as a percentage of sales8.3% 8.2% 10
 8.1% 8.2% (10)8.3% 8.0% 30
 8.4% 8.0% 40
S&A as a percentage of sales19.6% 16.0% 360
 17.3% 16.1% 120
16.1% 16.7% (60) 16.5% 16.3% 20
Operating margin16.0% 20.5% (450) 19.4% 20.3% (90)18.9% 20.8% (190) 17.7% 21.2% (350)
Adjusted operating margin (1)
19.4% 21.4% (200) 20.6% 20.9% (30)20.4% 20.9% (50) 20.1% 21.1% (100)
Effective tax rate20.8% 25.5% (470) 22.7% 22.1% 60
22.7% 23.2% (50) 19.6% 23.3% (370)
Segment net sales                      
Flavors$366,857
 $359,103
 2 % $1,118,869
 $1,108,689
 1 %$414,323
 $379,504
 9 % $820,487
 $752,012
 9 %
Fragrances410,144
 405,989
 1 % 1,234,921
 1,198,851
 3 %428,538
 413,974
 4 % 850,667
 824,777
 3 %
Consolidated$777,001
 $765,092
   $2,353,790
 $2,307,540
  $842,861
 $793,478
   $1,671,154
 $1,576,789
  
 
(1)Adjusted operating margin excludes $26.8$12.7 million consisting of acquisition-related costs, costs associated with product recalls, legal charges, restructuring, integration-related and operational improvement initiative costs as well as gains on sales of fixed assets for the three months ended June 30, 2017 and excludes $1.0 million related to operational improvement initiative, acquisition-relation and restructuring costs which were partially offset by gains on sales of fixed assets and a favorable legal settlement for the three months ended June 30, 2016. For the six months ended June 30, 2017 adjusted operating margin excludes $38.7 million consisting of acquisition-related costs, costs associated with product recalls, tax assessment, legal charges, restructuring, integration-related and operational improvement initiative costs as well as gains on sales of fixed assets and excludes a benefit of $1.8 million related to gains on sales of fixed assets and a favorable legal settlement, which were only partially offset by acquisition-related, operational improvement initiative and restructuring costs for the threesix months ended SeptemberJune 30, 2016 and excludes $7.1 million acquisition-related and operational improvement initiative costs for the three months ended September 30, 2015. For the nine months ended September 30, 2016, adjusted operating margin excludes $27.9 million of legal charges, acquisition-related, operational improvement initiative and restructuring costs which were partially offset by the benefit of the Spanish capital tax settlement compared to the exclusion of $14.6 million of acquisition-related, restructuring and other charges, net and operational improvement initiative costs during the comparable 2015 period.2016. See "Non-GAAP Financial Measures" below.


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

THIRDSECOND QUARTER 20162017 IN COMPARISON TO THIRDSECOND QUARTER 20152016
Sales
Sales for the thirdsecond quarter of 20162017 totaled $777.0$842.9 million, an increase of 2%6% from the prior year quarter. On a currency neutral basis sales increased 3%, as a result of8%. Sales growth reflected new win performance partially offset by volume declines on existing business in both Flavors and Fragrance Compounds, in addition to strong growth in Fragrance Ingredients (driven by the impact of acquisitions) and lower volume erosion on existing business in Flavors.Fragrances. On both a reported and currency neutral basis, the effectacquisitions accounted for approximately 6% of the Lucas Meyer acquisition was approximately 1% to net sales amounts.


22


growth.
Flavors Business Unit
Flavors reported sales increased 2%9% from the prior year period while currency neutral sales increased 3%11% during the thirdsecond quarter of 20162017 compared to the 2015 period, which reflects2016 period. Acquisitions accounted for approximately 7% of the net sales growth on a reported basis and approximately 8% on a currency neutral basis. Sales growth excluding acquisitions reflected new win performance and lowerwhich was partially offset by volume erosiondeclines on existing business. The currency neutral increaseOverall growth was due to midprimarily driven by low single-digit growth in three ofall four Flavors end-use categories. The Flavors business delivered currency neutralsales growth in EAME andNOAM, LA and GA,EAME, led by LA.NOAM, and experienced sales declines in GA. Sales in NOAM, which included the impact of acquisitions, were led by high single-digit growth in Savory. LA sales were led by double-digit gains in Savory and Sweet and Dairy. EAME sales were driven by double-digit gains in Savory and Sweet, which were only partially offset by high single-digit declinesgains in Beverage. Sales in GAEAME were driven by double-digithigh single-digit gains in Dairy and mid single-digit gains in Beverage and low single-digit gains in Savory. NOAMSweet. GA sales declines were driven by mid to high single-digit declines in Beverage.Sweet and Dairy.
Fragrances Business Unit
The Fragrances business sales increased of 1%4% on a reported basis and 2%5% on a currency neutral basis for the thirdsecond quarter of 20162017 compared to the thirdsecond quarter of 2015.2016. Acquisitions accounted for substantially allapproximately 4% of the growth on aboth reported basis and accounted for approximately half of the growth on a currency neutral basis. The overall currency neutral increase was primarily drivensales growth. Excluding the effect of acquisitions, reported sales were flat reflecting new win performance offset by volume declines on existing business. Net sales reflected double-digit growth in Fine Fragrances and high single-digit growth in Fragrance Ingredients which is driven substantiallywere offset by the inclusion of acquisitions,double-digit declines in addition to mid single-digit growth in FabricHair Care and Personal Wash. Excluding the effects of acquisitions, Fragrance Ingredients sales increased low single-digits on a currency neutral basis.high single-digit declines in Toiletries.
Sales Performance by Region and Category
 
 % Change in Sales - Third Quarter 2016 vs. Third Quarter 2015 % Change in Sales - Second Quarter 2017 vs. Second Quarter 2016
 Fine Fragrances Consumer Fragrances Ingredients Total Frag. Flavors Total Fine Fragrances Consumer Fragrances Ingredients Total Frag. Flavors Total
NOAMReported1 % 5 % 10 % 6 % -1 % 2 %Reported12 % 7 % 2% 7 % 30 % 19 %
EAMEReported-5 % 0 % 11 % 1 % 2 % 1 %Reported15 % 4 % 8% 8 % 2 % 6 %
Currency Neutral (1)
-5 % 0 % 11 % 1 % 5 % 3 %
Currency Neutral (1)
19 % 8 % 11% 12 % 9 % 11 %
LAReported-6 % -12 % -26 % -12 % 4 % -6 %Reported-5 % -5 % 35% -2 % 13 % 3 %
Currency Neutral (1)
-3 % -9 % -24 % -9 % 7 % -4 %
Currency Neutral (1)
-7 % -6 % 34% -4 % 11 % 1 %
GAReported15 % 8 % 22 % 10 % 4 % 7 %Reported23 % -3 % 1% -2 % -3 % -3 %
Currency Neutral (1)
15 % 8 % 18 % 10 % 5 % 7 %
Currency Neutral (1)
25 % -2 % 3% -1 % -2 % -1 %
TotalReported-3 % 0 % 9 % 1 % 2 % 2 %Reported10 % 0 % 7% 4 % 9 % 6 %
Currency Neutral (1)
-3 % 1 % 8 % 2 % 3 % 3 %
Currency Neutral (1)
11 % 1 % 9% 5 % 11 % 8 %
(1)
Currency neutral sales growth is calculated by translating prior year sales at the exchange rates for the corresponding 20162017 period.

NOAM Flavors sales decreased 1%growth, which included the impact of acquisitions, primarily due to high single-digit declines in Beverage that were only partially offset byreflected low single-digit growth in Sweet. NOAM Fragranceall four end-use categories. Total Fragrances sales increased 6% principally duegrowth reflected double-digit gains in Fine Fragrances, mid to double-digithigh single-digit gains in Fabric Care and Home Care and low single-digit gains in Fragrance Ingredients, (which included the impact of acquisitions) and Fabric Care as well as low single-digit growth in Fine Fragrances, which waswere only partially offset by double-digit declines in Hair Care.
EAME Flavors currency neutral sales increased 5% primarily due toexperienced high single-digit gains in Dairy and mid single-digit gains in Beverage and Sweet. Total Fragrances sales growth was driven mainly by double-digit growth in Fine Fragrances as well as high single-digit growth in Fragrance Ingredients and low single-digit growth in Fabric Care which more than offset double-digit declines in Toiletries and high single-digit declines in Hair Care.


LA Flavors sales growth was driven by double-digit gains in Savory and Sweet and high single-digit gains in Beverage. Total Fragrances sales declines reflected double-digit gains in Fragrance Ingredients, which were only partiallymore than offset by double-digit declines in Personal Wash and Hair Care as well as high single-digit declines in Beverage. EAME Fragrance currency neutral sales increased 1% overall, driven mainly by double-digit growth in Fragrance Ingredients (which included the impact of acquisitions)Fine Fragrances and Hair Care, which more than offset mid to low single-digit declines in Fine Fragrances, FabricHome Care and Personal Wash.Fabric Care.
LAGA Flavors currency neutral sales increased 7%declines were driven by double-digit gains in Savory, Sweet and Dairy. LA Fragrances currency neutral sales decreased 9% overall, principally driven by double-digit declines in Fragrance Ingredients, Toiletries and Hair Care as well as mid to high single-digit declines in Fabric CareSweet and Home Care.
GA Flavors currency neutralDairy. Total Fragrances sales increased 5% from the prior year period driven by double-digit growth in Beverage and Dairy and low single-digit growth in Savory. GA Fragrances currency neutral sales growth of 10% wasdeclines were principally driven by double-digit gains in Fine Fragrances and low single-digit gains in Fragrance Ingredients (which included the impact of acquisitions)which were more than offset by double-digit declines in Personal Wash and Home Care as well as high single-digit gains in FabricHair Care.

Cost of Goods Sold
Cost of goods sold, as a percentage of sales, increased 80170 bps to 55.4%55.6% in the thirdsecond quarter of 20162017 compared to 54.6%53.9% in the thirdsecond quarter of 2015,2016, principally driven by unfavorable mix,price versus input costs and manufacturing performance and input costs which were only partially offset by cost savings and productivity initiatives.initiatives and the impact of acquisitions. Included in cost of goods sold waswere $9.6 million of acquisition-related amortization of inventory "step-up" costs, costs associated with product recalls, operational improvement initiative and integration-related costs in 2017 compared to $1.0 million of restructuring and

23


operational improvementacquisition-related amortization of inventory "step-up" costs, in 2016 compared to $2.7 million of acquisition-related and operational improvement initiative costs and restructuring costs in 2015.2016.
Research and Development (R&D) Expenses
Overall R&D expenses, as a percentage of sales, increased slightly compared to the prior year period atto 8.3% in the thirdsecond quarter of 2017 versus 8.0% in the second quarter of 2016 versus 8.2% in the third quarter. This increase was primarily driven by costs associated with R&D of 2015.acquired entities.
Selling and Administrative (S&A) Expenses
S&A expenses increased $29.8$3.1 million to $152.0$135.9 million or 19.6%16.1%, as a percentage of sales, in the thirdsecond quarter of 20162017 compared to 16.0%$132.8 million or 16.7%, as a percentage of sales, in the thirdsecond quarter of 2015.2016. The $29.8$3.1 million increase was principally due to costs associated with S&A expenses of acquired entities as well as strategic investments, compliance and litigation-related costs that are expected to continue in the fourth quarter and approximately $25.8$2.2 million of legal charges, acquisition-related and acquisition-relatedintegration-related costs in 2016.2017. Excluding the $25.8$2.2 million of legal charges and acquisition-related costs included in 20162017 and the $4.4$0.2 million of acquisition-related costs which were only partially offset by credits related to adjustment of a legal reserve in 2015,2016, adjusted S&A expenses increased by $8.4$1.1 million and was 16.2%15.9% of sales in 20162017 compared to 15.4%16.7% of sales in 2015.2016.
Restructuring and Other Charges
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.
During the second quarter of 2017, the Company recorded $3.1 million of charges related to personnel-related costs and lease termination costs, with the remainder of the personnel-related costs expected to be recognized by the end of 2017 and the other costs expected to be recognized over the following six quarters. During the second quarter of 2017, the Company made payments of $4.5 million related to severance. 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 in various parts of the organization. Once fully implemented, the Company expects to realize annual run-rate savings of between $40 million and $45 million from this program by 2019.
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 the second quarter of 2017, the Company 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 related to these 2015 initiatives.



Amortization of Acquisition-Related Intangibles
Amortization expenses remained consistent at $5.5increased to $8.5 million in the thirdsecond quarter of 20162017 compared to $5.4$5.1 million in the thirdsecond quarter of 2015.2016. The increase was principally driven by the acquisitions of Fragrance Resources and PowderPure in 2017 and David Michael during the second half of 2016.
Operating Results by Business Unit
We evaluate the performance of business units based on segment profit which is defined as operating profit before Restructuring and other charges, net, Global expenses (as discussed in Note 9 to the Consolidated Financial Statements) and certain non-recurring items, net, Interest expense, Other (expense) income, net and Taxes on income. See Note 9 to the Consolidated Financial Statements for the reconciliation to Income before taxes. 
Three Months Ended September 30,Three Months Ended June 30,
(DOLLARS IN THOUSANDS)2016 20152017 2016
Segment profit:      
Flavors$77,512
 $79,803
$100,338
 $90,337
Fragrances85,010
 90,893
84,860
 87,596
Global expenses(11,405) (6,874)(13,398) (12,268)
Restructuring and other charges, net(190) —
(791) (182)
Acquisition and related costs(786) (6,830)(6,278) (213)
Operational improvement initiative costs(802) (279)(445) (831)
Legal charge(25,000) —
Legal (charges) credits(1,000) 36
Gain on sales of assets68
 197
Tax assessment19
 —
Integration-related costs(731) —
FDA mandated product recall(3,500) —
Operating profit$124,339
 $156,713
159,142
 164,672
Profit margin:      
Flavors21.1% 22.2%24.2% 23.8%
Fragrances20.7% 22.4%19.8% 21.2%
Consolidated16.0% 20.5%18.9% 20.8%

Flavors Segment Profit
Flavors segment profit decreasedincreased to $77.5$100.3 million in the thirdsecond quarter of 2016,2017, or 21.1%24.2% as a percentage of sales, compared to $79.8$90.3 million, or 22.2%23.8% as a percentage of sales, in the comparable 20152016 period. The decreaseincrease principally reflects unfavorable mix, inputreflected favorable volume and costs savings and increased S&Aproductivity initiatives which were only partially offset by cost savingsunfavorable manufacturing variances and productivity initiatives.mix.
Fragrances Segment Profit
Fragrances segment profit decreased approximately 6.5%3.1% to $85.0$84.9 million in the thirdsecond quarter of 2016,2017, or 20.7%19.8% as a percentage of sales, compared to $90.9$87.6 million, or 22.4%21.2% as a percentage of sales, in the comparable 20152016 period. The decrease in segment profit and profit margin was primarily due to unfavorable mix, manufacturing performanceprice versus input cost and increased S&Athe impact from acquisitions which werewas only partially offset by the cost savings and productivity initiatives.


24


Global Expenses
Global expenses represent corporate and headquarters-related expenses which include legal, finance, human resources and R&D and other administrative expenses that are not allocated to an individual business unit. In the thirdsecond quarter of 2016,2017, Global expenses were $11.4$13.4 million compared to $6.9$12.3 million during the thirdsecond quarter of 2015.2016. The increase was principally driven by lower favorable impactbenefits from the cash flowour currency hedging program in the current year.and higher incentive compensation expense.




Interest Expense
Interest expense increased $1.2 million to $13.117.6 million in the thirdsecond quarter of 20162017 compared to $11.9$15.1 million in the 20152016 period reflecting the impactissuance of borrowings under the Euro Senior Notes - 2016.2017. Average cost of debt was 3.7%4.1% for the 20162017 period compared to 4.3%4.0% for the 20152016 period.
Other (Income) Expense, Net
Other (income) expense, net increaseddecreased by approximately $4.2$2.0 million to $2.2$0.5 million of income in the thirdsecond quarter of 20162017 versus $2.0$2.4 million of expenseincome in the comparable 20152016 period. The year-over-year increase isdecrease was primarily driven by higherunfavorable year-over-year foreign exchange gainsgains/(losses) in 2016.2017.
Income Taxes
The effective tax rate for the three months ended SeptemberJune 30, 20162017 was 20.8%22.7% compared with 25.5%23.2% for the three months ended SeptemberJune 30, 2015.2016. The quarter-over-quarter decrease iswas largely due to a more favorable mix of earnings and a lower costthe impact of the global supply chain hub, offset by unfavorable repatriation costs as compared to the prior year. Excluding $3.3 million of benefits associated with the pre-tax acquisition-related costs, costs associated with product recalls, legal charges, restructuring, integration-related and operational improvement initiative costs as partially offset by higher loss provisions in 2016. Excluding the $9.3 million tax benefitcharge associated with the pretax legal charge, acquisition-related, operational improvement initiatives and restructuring costs includedgains on sales of fixed assets in the current quarter, the thirdsecond quarter 2017 adjusted effective tax rate was 23.0%, or 10 bps lower than the second quarter 2016 adjusted effective tax rate was 23.5%, or 140 bps lower than the third quarter 2015 adjusted effective tax rate of 24.9%23.1%. The 20152016 adjusted effective tax rate excluded $0.9$0.1 million of tax benefit associated with the pretax acquisition-relatedrestructuring and operational improvement initiative costs.costs which were only partially offset by tax charges associated with acquisition related costs and gains on the sales of fixed assets and a favorable legal settlement.
As a result of the adoption of ASU 2016-09, as discussed in Note 1 to our Consolidated Financial Statements, current income tax expense now includes the tax benefit of equity award vestings of $2.4 million for the three months ended June 30, 2017.

FIRST NINESIX MONTHS OF 20162017 IN COMPARISON TO FIRST NINESIX MONTHS 20152016
Sales
Sales for the first ninesix months of 20162017 totaled $2.4 billion,$1,671.2 million, an increase of 2%6% from the prior year2016 period. On a currency neutral basis sales increased 4%, as a result of7%. Sales growth reflected new win performance partially offset by volume declines on existing business in both Flavors and Fragrance Compounds,Fragrances and unfavorable pricing in addition to strong growth in Fragrance Ingredients, driven by the impact of acquisitions and lower volume erosion on existing business in Flavors.Fragrances. On both a reported and currency neutral basis, the effectacquisitions accounted for approximately 5% of acquisitions was approximately 2% tothe net sales amounts. Overall currency neutral growth included 4% growth from both developed and emerging markets.growth.
Flavors Business Unit
Flavors reported sales increased 1% against the prior year period while9% on a reported basis and increased 11% on a currency neutral sales increased 4%basis during the first ninesix months of 20162017 compared to the 2015 period, with2016 period. Acquisitions accounted for approximately half7% of the net sales growth driven by the inclusion of acquisitions inon both a reported and currency neutral basis amounts. In addition, the overall performance reflectsbasis. Sales growth excluding acquisitions reflected new win performance and lowerwhich was partially offset by volume erosion. The currency neutral increasedeclines on existing business. Overall growth was due toprimarily driven by low to midhigh single-digit growth in all four end-use categories. The Flavors business delivered currency neutralsales growth in all four regions,NOAM, LA and EAME, led by NOAM, and experienced declines in GA. Sales growth in NOAM, which included the impact of acquisitions, were led by high single-digit gainsdouble-digit growth in SweetSavory and low single-digit gains in Beverage. Sales in GA were driven by high single-digit gains in Dairy as well as mid single-digit gains in Sweet and Beverage.Dairy. LA sales were drivengrowth was led by double-digit gains in Savory and Dairy.Dairy and high single-digit gains in Sweet. Sales in EAME sales were driven by mid to high single-digit gains in SweetSavory and Dairy.Sweet. GA sales experienced mid single-digit gains in Beverage which were more than offset by high single-digit declines in Dairy and low single-digit declines in Sweet.
Fragrances Business Unit
The Fragrances business experienced an increase ofsales increased 3% in reported sales and a 5% increase in currency neutral sales for the first nine months of 2016 compared to the 2015 period. Acquisitions accounted for primarily all of the growth on a reported basis and approximately two-thirds of the growth4% on a currency neutral basis. The overallbasis for the first six months of 2017 compared to the 2016 period. Acquisitions accounted for approximately 4% of both reported and currency neutral increasesales growth. Excluding the effect of acquisitions, reported sales declines reflected new win performance which was primarily drivenmore than offset by volume declines on existing business and unfavorable price versus input costs. Net sales reflected double-digit growthgains in Fine Fragrances, mid single-digit gains in Fragrance Ingredients which is driven entirely by the inclusion of acquisitions, as well as midand low single-digit growth in Fabric Care which were more than offset by double-digit declines in Hair Care and highmid single-digit growthdeclines in Toiletries and Personal Wash. Excluding the effects of acquisitions, Fragrance Ingredients sales declined low single-digits on a currency neutral basis.



25


Sales Performance by Region and Category
 
 % Change in Sales - First Nine Months 2016 vs. First Nine Months 2015 % Change in Sales - First Six Months 2017 vs. First Six Months 2016
 Fine Fragrances Consumer Fragrances Ingredients Total Frag. Flavors Total Fine Fragrances Consumer Fragrances Ingredients Total Frag. Flavors Total
NOAMReported3 % 7 % 18 % 9 % 4 % 6 %Reported10 % 6 % -4 % 4 % 28 % 17 %
EAMEReported-3 % -1 % 12 % 1 % -1 % 0 %Reported18 % 4 % 10 % 10 % 1 % 6 %
Currency Neutral (1)
-2 % 1 % 14 % 3 % 2 % 3 %
Currency Neutral (1)
22 % 8 % 13 % 13 % 7 % 11 %
LAReported-2 % -4 % -16 % -5 % -2 % -4 %Reported-9 % -7 % 25 % -5 % 11 % 0 %
Currency Neutral (1)
5 % -1 % -15 % -1 % 3 % 0 %
Currency Neutral (1)
-14 % -7 % 24 % -7 % 8 % -1 %
GAReported2 % 6 % 15 % 8 % 2 % 4 %Reported18 % 0 % -6 % 0 % -1 % 0 %
Currency Neutral (1)
3 % 8 % 14 % 9 % 4 % 6 %
Currency Neutral (1)
20 % 1 % -4 % 1 % 0 % 0 %
TotalReported-1 % 2 % 12 % 3 % 1 % 2 %Reported10 % 1 % 4 % 3 % 9 % 6 %
Currency Neutral (1)
1 % 4 % 13 % 5 % 4 % 4 %
Currency Neutral (1)
11 % 2 % 5 % 4 % 11 % 7 %
(1)Currency neutral sales growth is calculated by translating prior year sales at the exchange rates for the corresponding 20162017 period.

NOAM Flavors sales increased 4%,growth, which included the impact of acquisitions, contributing to high single-digitwere led by double-digit growth in SweetSavory and low single-digitDairy. Total Fragrances sales growth, in Beverage, which more than offset low single-digit declines in Dairy. NOAM Fragrance sales increased 9%, principally due to double-digit gains Fragrance Ingredients (which included the impact of acquisitions) and Fabric Care as well as high single-digit gains in Home Care and mid single-digitacquisitions, reflected double-digit gains in Fine Fragrances.
EAME Flavors currency neutral sales increased 2% primarily due toFragrances and mid to high single-digit growth in SweetHome Care and DairyFabric Care, which was partially offset by mid single-digit declines in Fragrance Ingredients.
EAME Flavors sales experienced mid to high single-digit gains in Savory and low single-digitSweet. Total Fragrances sales growth, in Savory. EAME Fragrance currency neutral sales increased 3% overall,which included the impact of acquisitions, was driven mainly by double-digit growth in Fragrance Ingredients (which included the impact of acquisitions)Fine Fragrances and Hair Care.
LA Flavors currency neutral sales were up 3% driven by double-digit gains in the Savory and Dairy. LA Fragrances currency neutral sales declined 1% overall, principally led by double-digit declines in Fragrance Ingredients as well as mid single-digit growth in Home Care.
LA Flavors sales growth was driven by double-digit gains in Savory and Dairy and high single-digit gains in Sweet. Total Fragrances sales declines reflected double-digit gains in Fragrance Ingredients, which were more than offset by double-digit declines in Hair Care and Personal Wash and low to high single-digit declines in Fabric Care and Toiletries, which were only partially offset by double-digit growth in Personal Wash and mid single-digit growth in Fine Fragrances.Home Care.
GA Flavors currency neutral sales increased 4% from the prior year perioddeclines were driven by high single-digit gains in Dairy, mid single-digit gains in Beverage and Sweet and low single-digit gains in Savory. GA Fragrances currency neutral sales growth of 9% was principally driven by double-digit gains in Fragrance Ingredients (which included the impact of acquisitions) Fabric Care and Personal Wash which were more than offset by high single-digit declines in Dairy and low single-digit declines in Sweet. Total Fragrances flat sales growth principally reflected double-digit gains in Fine Fragrances and low single-digit growth in Fabric Care which were offset by mid single-digit declines in Fragrance Ingredients, Hair Care.Care and Personal Wash.

Cost of Goods Sold
Cost of goods sold, as a percentage of sales, decreased 50increased 180 bps to 54.5%55.8% in the first ninesix months of 20162017 compared to 55.0%54.0% in the first nine months of 2015,2016 period, principally driven by unfavorable manufacturing performance and price versus input costs which were only partially offset by cost savings and productivity initiatives.initiatives and the impact of acquisitions. Included in cost of goods sold was $3.3were $15.7 million of acquisition-related amortization of inventory "step-up", costs associated with product recalls, operational improvement initiative and integration-related costs in 2017 compared to $2.3 million of acquisition-related amortization of inventory "step-up", operational improvement initiative and restructuring costs in 2016 compared to $4.2 million of acquisition-related and operational improvement initiative costs in 2015.2016.
Research and Development (R&D) Expenses
Overall R&D expenses, as a percentage of sales, decreased slightlyincreased compared to the prior year period at 8.1%to 8.4% in the first ninesix months of 2017 versus 8.0% in the 2016 versus 8.2% for the first nine monthsperiod. This increase was primarily driven by costs associated with R&D of 2015.acquired entities.
Selling and Administrative (S&A) Expenses
S&A expenses increased $36.1$19.9 million to $408.4$276.2 million or 17.3%16.5%, as a percentage of sales, in the first ninesix months of 20162017 compared to 16.1%16.3% in the first nine months2016 period. The $19.9 million increase was principally due to costs associated with S&A expenses of 2015. The 2016 amount includes $24.7acquired entities and approximately $12.0 million of expense related to a tax assessment from prior year, legal charges and acquisition-related costs. The 2015 amount includes $10.6and integration-related costs in 2017. Excluding the $12.0 million included in 2017 and the benefit of $1.1 million of credits related to legal credits which were only partially offset by acquisition-related costs. Excluding these items,costs in 2016, adjusted S&A expenses were $383.7increased by $6.8 million or 16.3%, as a percentageand was 15.8% of sales in 20162017 compared to $361.7 million or 15.7% of sales in 2015. The increase of $22.0 million was principally due to higher compensation expense as well as strategic investments, compliance and litigation-related costs that are expected to continue in the fourth quarter16.3% in 2016.


Restructuring and Other Charges
26

2017 Productivity Program

During the first six months of 2017, the Company recorded charges of $13.2 million related to personnel-related costs and lease termination costs and made payments of $6.8 million related to severance. 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 in various parts of the organization. Once fully implemented, the Company expects to realize annual run-rate savings of between $40 million and $45 million from this program by 2019.
2015 Severance Charges
During the first six months of 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 related to these 2015 initiatives.
Amortization of Acquisition-Related Intangibles
Amortization expenses increased $6.4 million to $16.7$15.6 million in the first ninesix months of 20162017 compared to $10.3$11.2 million in the first nine months of 2015.2016 period. The $6.4 million increase was principally driven by the acquisitions of Ottens FlavorsFragrance Resources and Lucas MeyerPowderPure in 2017 and David Michael during the second and third quartershalf of 2015, respectively.2016.
Operating Results by Business Unit
We evaluate the performance of business units based on segment profit which is defined as operating profit before Restructuring and other charges, net, Global expenses (as discussed in Note 9 to the Consolidated Financial Statements) and certain non-recurring items, net, Interest expense, Other (expense) income, net and Taxes on income. See Note 9 to the Consolidated Financial Statements for the reconciliation to Income before taxes. 
Nine Months Ended September 30,Six Months Ended June 30,
(DOLLARS IN THOUSANDS)2016 20152017 2016
Segment profit:      
Flavors$259,662
 $256,546
$198,346
 $182,151
Fragrances261,843
 252,416
166,557
 176,833
Global expenses(37,544) (27,067)(29,594) (26,141)
Restructuring and other charges, net(473) 170
(10,934) (283)
Acquisition and related costs(2,035) (13,896)(15,066) (1,249)
Operational improvement initiative costs(1,901) (841)(1,066) (1,099)
Spanish capital tax settlement1,482
 —
Legal charge(25,000) —
Legal (charges) credits(1,000) 1,482
Gain on sales of assets89
 2,910
Tax assessment(5,331) —
Integration-related costs(1,923) —
FDA mandated product recall(3,500) —
Operating profit$456,034
 $467,328
296,578
 334,604
Profit margin:      
Flavors23.2% 23.1%24.2% 24.2%
Fragrances21.2% 21.1%19.6% 21.4%
Consolidated19.4% 20.3%17.7% 21.2%

Flavors Segment Profit
Flavors segment profit increased to $259.7$198.3 million in the first ninesix months of 2016,2017, or 23.2%24.2% as a percentage of sales, with $256.5compared to $182.2 million, or 23.1%24.2% as a percentage of sales, in the comparable 2015 period,2016 period. The increase in segment profit principally reflectingreflected favorable volume and costs savings and productivity initiatives which were only partially offset by unfavorable mix and incrementalprice versus input costs related to new sites.as well as a reserve for a product liability sales allowance.




Fragrances Segment Profit
Fragrances segment profit increased approximately 4%decreased to $261.8$166.6 million in the first ninesix months of 2016,2017, or 21.2%19.6% as a percentage of sales, compared to $252.4$176.8 million, or 21.1%21.4% as a percentage of sales, in the comparable 20152016 period. The increasedecrease in segment profit and profit margin was primarily due to productivity initiatives,unfavorable price versus input cost and the impact of Lucas Meyer and volume growth,acquisitions which was only partially offset by the net impact of price versus input costs.cost savings and productivity initiatives.
Global Expenses
Global expenses represent corporate and headquarters-related expenses which include legal, finance, human resources and R&D and other administrative expenses that are not allocated to an individual business unit. In the first ninesix months of 2016,2017, Global expenses were $37.5$29.6 million compared to $27.1$26.1 million during the 2015 period.first six months of 2016. The increase was principally driven by lower favorable impactbenefits from the cash flowour currency hedging program and slightly higher incentive compensation in the current year.expense.
Interest Expense
Interest expense increased $6.2 million to $40.6$30.4 million in the first ninesix months of 20162017 compared to $34.4$27.5 million in the 20152016 period reflecting the impactissuance of borrowings under the Euro Senior Notes - 2016.2017. Average cost of debt was 3.8% for the 20162017 period compared to 4.6%3.9% for the 20152016 period.


27


Other (Income) Expense, netNet
Other (income) expense, net increased by approximately $1.7$14.4 million to $5.0$14.3 million of income in the first ninesix months of 20162017 versus $3.3$0.1 million of incomeexpense in the comparable 20152016 period. The year-over-year increase iswas primarily driven by the release of a gain oncurrency translation adjustment (CTA) of $12.2 million related to the saleliquidation of land, which was partially offset by lowera foreign exchange gainsentity in the 2016 period.2017.
Income Taxes
The effective tax rate for the ninesix months ended SeptemberJune 30, 20162017 was 22.7%19.6% compared with 22.1%23.3% for the ninesix months ended SeptemberJune 30, 2015.2016. The increaseyear-over-year decrease was largelyprimarily due to various items (including 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 benefitmore favorable mix of $10.5earnings and the impact of the global supply chain hub, offset by unfavorable repatriation costs as compared to the prior year. Excluding $11.8 million recordedof tax benefits associated with pre-tax restructuring, acquisition-related, product liability, integration-related and operational improvement initiative costs as well as a tax assessment which were only partially offset by the tax charge associated with gains on sales of fixed assets and the non-taxable gains on foreign currency in the first ninequarter, the first six months of 2015, as a result of favorable tax rulings in Spain and another jurisdiction for which reserves were previously recorded and higher loss provisions in 2016, partially offset by lower cost of repatriation in the 2016 period. Excluding the $9.4 million tax benefit associated with pretax legal charges, restructuring, operational improvement initiatives and acquisition-related costs, the 2016 period2017 adjusted effective tax rate was 23.3%21.8%, or 80150 bps lower than the 2015 periodfirst six months 2016 adjusted effective tax rate of 24.1%23.3%. The 20152016 adjusted effective tax rate excluded $2.0$0.5 million of tax benefitcharges associated with pretaxgains on sales of fixed assets and a favorable legal settlement which were only partially offset by tax benefits related to the pre-tax acquisition-related, restructuring and operational improvement initiative costs.
As a result of the adoption of ASU 2016-09, as discussed in Note 1 to our Consolidated Financial Statements, current income tax expense now includes the tax benefit of equity award vestings of $3.2 million for the six months ended June 30, 2017. In recent years, the tax benefit on these vestings was $4.5 million, $9.9 million and acquisition-related costs$5.3 million in fiscal 2014, 2015 and the $10.5 million settlement related to the favorable tax ruling discussed above.2016, respectively.

Liquidity and Capital Resources
CASH AND CASH EQUIVALENTSCash and Cash Equivalents
We had cash and cash equivalents of $498.7$491.4 million at SeptemberJune 30, 20162017 compared to $182.0$324.0 million at December 31, 2015,2016, of which $239.8$198.5 million of the balance at SeptemberJune 30, 20162017 was held outside the United States. Cash balances held in foreign jurisdictions are, in most circumstances, available to be repatriated to the United States; however, they would be subject to United States federal income taxes, less applicable foreign tax credits. We have not provided U.S. income tax expense on substantially all of the accumulated undistributed earnings of our foreign subsidiaries because we have the ability and plan to reinvest these indefinitely.
Effective utilization of the cash generated by our international operations is a critical component of our tax strategy. Strategic dividend repatriation from foreign subsidiaries creates U.S. taxable income, which enables us to realize deferred tax assets. The Company regularly repatriates, in the form of dividends from its non-U.S. subsidiaries, a portion of its current year earnings to fund financial obligations in the U.S.

CASH FLOWS FROM OPERATING ACTIVITIES


Cash Flows Provided By Operating Activities
Net cash provided byfrom operating activities in the first ninesix months of 20162017 was $329.4$57.9 million compared to $294.7$172.3 million in the first ninesix months of 2015.2016. The increasedecrease in cash from operating cash flowsactivities for the first ninesix months of 20162017 compared to 20152016 was principally driven by payment of a litigation settlement of $56 million (as discussed in Note 13 to the Consolidated Financial Statements), lower pension contributionsnet income and lower core working capital requirements inhigher incentive compensation payments for the 20162017 period as compared to 20152016 period.
Working capital (current assets less current liabilities) totaled $1,001.1$1,132.7 million at SeptemberJune 30, 2016,2017, compared to $712.0$710.7 million at December 31, 2015.2016 reflecting higher cash balances as a result of proceeds from the Senior Notes - 2017. The Company sold certain accounts receivable on a non-recourse basis to unrelated financial institutions under “factoring” agreements that are sponsored, solely and individually, by certain customers. We believe that participating in the factoring programs strengthens our relationships with these customers and provides operational efficiencies. The beneficial impact on cash provided by operations from participating in these programs increaseddecreased approximately $25.8$4.7 million for the ninesix months ended SeptemberJune 30, 20162017 compared to an increase of approximately $0.2$17.7 million for the ninesix months ended SeptemberJune 30, 2015.2016. The cost of participating in these programs was immaterial to our results in all periods.
CASH FLOWS USED IN INVESTING ACTIVITIESCash Flows Used In Investing Activities
Net investing activities during the first ninesix months of 20162017 used $66.2$232.0 million compared to $546.1$40.2 million in the prior year period. The decreaseincrease in cash used in investing activities principally reflectsreflected the acquisitionsacquisition of Ottens FlavorsFragrance Resources and Lucas Meyer during the 2015 period.PowderPure in 2017 for approximately $136.0 million and $54.7 million (net of cash acquired), respectively. Additions to property, plant and equipment were $70.2$46.2 million during the first ninesix months of 20162017 compared to $66.6$43.2 million in the first ninesix months of 2015.2016. We expect additions to property, plant and equipment will be approximately 4.5% - 5% of our sales (net of potential grants and other reimbursements from government authorities) in 2016.2017.
CASH FLOWS PROVIDED BY FINANCING ACTIVITIESCash Flows Provided By Financing Activities
Net financing activities in the first ninesix months of 2016 remained flat with $65.82017 increased to $343.6 million of cash inflows compared to $66.9$235.4 million of cash inflows in the first ninesix months of 2015, reflecting2016, principally driven by higher borrowings that were offset byproceeds from the repaymentrevolving credit facility and the issuance of ourthe Senior Notes - 20062017 as well as lower share repurchases which were only partially offset by higher dividend payments and treasury stock repurchases in the 2017 period compared to the 2016 period, which included the issuance of the Euro Senior Notes - 2016.

28


At SeptemberJune 30, 2016,2017, we had $1,367.9$1,894.2 million of debt outstanding compared to $1,067.7$1,325.4 million outstanding at December 31, 2015.2016.
We paid dividends totaling $134.1$101.2 million in the 20162017 period. We declared a cash dividend per share of $0.64 in the thirdsecond quarter of 20162017 that was paid on October 6, 2016July 7, 2017 to all shareholders of record as of SeptemberJune 26, 2016.2017. In August 2017, the Board of Directors approved an increase in our quarterly dividend for the third quarter of 2017 by 8%, to $0.69 per share.
In December 2012, the Board of Directors authorized a $250 million share repurchase program, which commenced in the first quarter of 2013. In August 2015, the Board of Directors approved an additional $250 million share repurchase authorization and extension through December 31, 2017. Based on the total remaining amount of $142.6$56.1 million available under the amended repurchase program, approximately 1.00.4 million shares, or 1.3%0.5% of shares outstanding (based on the market price and shares outstanding as of SeptemberJune 30, 2016)2017) could be repurchased under the program as of SeptemberJune 30, 2016.2017. During the three months ended June 30, 2017, we repurchased 114,930 shares on the open market at an aggregate cost of $15.6 million or an average of $135.7 per share. During the six months ended June 30, 2017, we repurchased 427,219 shares on the open market at an aggregate cost of $53.2 million or an average of $124.6 per share. The purchases 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 placed into treasury stock. During the three months ended September 30, 2016, we repurchased 167,307 shares on the open market at an aggregate cost of $22.4 million or an average of $134.08 per share. During the nine months ended September 30, 2016, we repurchased 789,531 shares on the open market at an aggregate cost of $94.1 million or an average of $119.24 per share. The ultimate level of purchases will be a function of the daily purchase limits established in the pre-approved program according to the share price at that time.
CAPITAL RESOURCESCapital Resources
Operating cash flow provides the primary source of funds for capital investment needs, dividends paid to shareholders and debt repayments. We anticipate that cash flows from operations and availability under our existing credit facilities are sufficient to meet our investing and financing needs for at least the next eighteen months. We regularly assess our capital structure, including both current and long-term debt instruments, as compared to our cash generation and investment needs in order to provide ample flexibility and to optimize our leverage ratios. We believe our existing cash balances are sufficient to meet our debt service requirements.
We supplement short-term liquidity with access to capital markets, mainly through bank credit facilities and issuance of commercial paper. We did not issueCommercial paper issued by the Company generally has terms of 90 days or less. The maximum commercial


paper borrowings outstanding during the first nine monthsand second quarters of 2016 or 2015. During the fourth quarter of 2016, we issued2017 were approximately $107.5 million and $50 million, face valuerespectively. As of June 30, 2017, there was no commercial paper.paper outstanding. The revolving credit facility is used as a backstop for the Company's commercial paper program. No commercial paper was issued during the six months ended June 30, 2016.
We expect to contribute a total of approximately $30 million to our non-U.S. pension plans and $20$2 - $10 million to our U.S. pension plans during 2016.2017. During the ninesix months ended SeptemberJune 30, 2016, $20.0 million2017, no contributions were made to our qualified U.S. pension plans and $21.1$29.3 million contributions were made to our non-U.S. pension plans.
On March 14, 2016, weMay 18, 2017, the Company issued Euro 500.0$500.0 million face amount of 1.75%4.375% Senior Notes ("Euro Senior Notes - 2016"2017") due 20242047 at a discount of Euro 0.9$1.8 million. The Company received proceeds related to the issuance of these Euro Senior Notes - 20162017 of Euro 496.0$493.9 million which was net of the Euro 0.9$1.8 million discount and Euro 3.1$4.4 million in underwriting discountfees (recorded as deferred financing costs). In addition, the Company incurred $1.3$0.9 million of otherin legal and professional costs associated with the issuance and such costs were recorded as deferred financing costs incosts. In connection with the debt issuance.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, and deferred financing costs and pre-issuance hedge loss are being amortized as interest expense over the 30 year term of the Eurodebt. The Senior Notes - 2016. The Euro Senior Notes - 20162017 bear interest at a rate of 1.75%4.375% per annum, with interest payable semi-annually on March 14June 1 and December 1 of each year, commencing on March 14,December 1, 2017. The Euro Senior Notes - 20162017 will mature on March 14, 2024. See Note 6 to the Consolidated Financial Statements for further information.

During the third quarter of 2016, the Company made final payment of $125.0 million on our Senior Notes - 2006.June 1, 2047.
As of SeptemberJune 30, 2016,2017, we had no$28.4 million of borrowings under our revolving credit facility. The amount which we are able to draw down on under the facility is limited by financial covenants as described in more detail below. Our draw down capacity on the facility was $950.0$921.6 million at SeptemberJune 30, 2016.2017. We expect interest expense to increase in the third quarter of 2017 as a result of a full quarter of interest related to the Senior Notes - 2017.
Under our revolving credit facility, we are required to maintain, at the end of each fiscal quarter, a ratio of net debt for borrowed money to adjusted EBITDA in respect of the previous 12-month period of not more than 3.253.5 to 1. Based on this ratio, at SeptemberJune 30, 20162017 our covenant compliance provided overall borrowing capacity of $1,525$1,279 million.
At SeptemberJune 30, 2016,2017, we were in compliance with all financial and other covenants, including the net debt to adjusted EBITDA ratio. At SeptemberJune 30, 20162017 our Net Debt/adjusted EBITDA (1) ratio, as defined by the debt agreements, was 1.181.83 to 1, well below the financial covenants of existing outstanding debt. Failure to comply with the financial and other covenants under our debt agreements would constitute default and would allow the lenders to accelerate the maturity of all indebtedness under the related agreement. If such acceleration were to occur, we would not have sufficient liquidity available to repay the indebtedness. We would likely have to seek amendments under the agreements for relief from the financial covenants or repay

29


the debt with proceeds from the issuance of new debt or equity, and/or asset sales, if necessary. We may be unable to amend the agreements or raise sufficient capital to repay such obligations in the event the maturities are accelerated.

(1)Adjusted EBITDA and Net Debt, which are non-GAAP measures used for these covenants, are calculated in accordance with the definition in the debt agreements. In this context, these measures are used solely to provide information on the extent to which we are in compliance with debt covenants and may not be comparable to adjusted EBITDA and Net Debt used by other companies. Reconciliations of adjusted EBITDA to net income and net debt to total debt are as follows:
Twelve Months Ended September 30,Twelve Months Ended June 30,
(DOLLARS IN MILLIONS)2016 20152017
Net income$404.2
 $430.2
$395.3
Interest expense52.4
 46.4
55.8
Income taxes118.9
 123.6
102.0
Depreciation and amortization99.5
 86.0
108.3
Specified items (1)
40.0
 0.2
89.0
Non-cash items (2)
21.0
 19.7
15.8
Adjusted EBITDA$736.0
 $706.1
$766.2
 
(1)Specified items for the 12 months ended SeptemberJune 30, 20162017 of $40.0$89.0 million consist of the legal charge related to the ZoomEssence reserve recorded in the third quarter of 2016 as well ascharges/credits, acquisition-related costs, costs associated with product recalls, operational improvement initiative costs, restructuring and the accelerationother charges, gains on sales of the contingent consideration related to the Aromor acquisition as discussed in our 2015 Form 10-K.fixed assets, integration-related costs, tax assessment and CTA realization.
(2)Non-cash items represent all other adjustments to reconcile net income to net cash provided by operations as presented on the Statement of Cash Flows, including gain on disposal of assets and stock-based compensation and pension settlement/curtailment.compensation.


September 30,June 30,
(DOLLARS IN MILLIONS)2016 20152017
Total debt$1,367.9
 $1,191.0
$1,894.2
Adjustments:    
Deferred gain on interest rate swaps(1.8) (3.7)(0.4)
Cash and cash equivalents(498.7) (272.3)(491.4)
Net debt$867.4
 $915.0
$1,402.4
As discussed in Note 13 to the Consolidated Financial Statements, at SeptemberJune 30, 20162017, we had entered into various guarantees and had undrawn outstanding letters of credit from financial institutions. These arrangements reflect ongoing business operations, including commercial commitments, and governmental requirements associated with audits or litigation that are in process with various jurisdictions. Based on the current facts and circumstances they are not reasonably likely to have a material impact on our consolidated financial condition, results of operations, or cash flows.

Cautionary Statement Under the Private Securities Litigation Reform Act of 1995
This Quarterly Report includes “forward-looking statements” under the Federal Private Securities Litigation Reform Act of 1995, including statements regarding our expectations concerning (i) expected raw material costs in 2017, (ii) the expected impact of operational improvements, cost pressuresreduction efforts and mix enhancements on margins, (iii) the expected impact of the multi-year productivity program announced in 2016, (ii) capital spending in 2016, (iii)2017, (iv) cash flows to fund future operations and to meet debt service requirements, and (iv)(v) our plans and intentions to indefinitely reinvest undistributed foreign earnings in our foreign subsidiaries to fund local operations and/or capital projects. These forward-looking statements should be evaluated with consideration given to the many risks and uncertainties inherent in our business that could cause actual results and events to differ materially from those in the forward-looking statements. Certain of such forward-looking information may be identified by such terms as “will,” “expect,” “anticipate,” “believe,” “outlook,” “may,” “estimate,” “should,” “intend,” “plan” and “predict” similar terms or variations thereof. Such forward-looking statements are based on a series of expectations, assumptions, estimates and projections about the Company, are not guarantees of future results or performance, and involve significant risks, uncertainties and other factors, including assumptions and projections, for all forward periods. Our actual results may differ materially from any future results expressed or implied by such forward-looking statements. Such factors include, among others, the following:



30



macroeconomic trends affecting the emerging markets;
our ability to implement and adapt our Vision 2020 strategy;
our ability to successfully identify and complete acquisitions in line with our Vision 2020 strategy, and to realize the anticipated benefits of those acquisitions;
our ability to effectively compete in our market, and to successfully develop new and competitive products that appeal to our customers and consumers;
changes in consumer preferences and demand for our products or a decline in consumer confidence and spending;
our ability to benefit from our investments and expansion in emerging markets;
the impact of currency fluctuations or devaluations in the principal foreign markets in which we operate, including the devaluation of the Euro;
the impact of customer claims or product recalls;
the potential adverse impact of Brexit on currency exchange rates, global economic conditions and cross-border agreements that affect our business;
the economic and political risks associated with our international operations, including challenging economic conditions in China and Latin America;
the effect of legal and regulatory developments, as well as restrictions or costs that may be imposed on us or our operations by U.S. and foreign governments;
the impact of any failure of our key information technology systems or costs that could be incurred due to a breach of data privacy or information security;
our ability to attract and retain talented employees;
our ability to comply with, and the costs associated with compliance, with U.S. and foreign environmental protection laws;
our ability to realize expected cost savings and efficiencies from our profitability improvement initiatives and other optimization activities;
volatility and increases in the price of raw materials, energy and transportation;
fluctuations in the quality and availability of raw materials;
the impact of a disruption in our supply chain or our relationship with our suppliers;
any adverse impact on the availability, effectiveness and cost of our hedging and risk management strategies;
our ability to successfully manage our working capital and inventory balances;


uncertainties regarding the outcome of, or funding requirements, related to litigation or settlement of pending litigation, uncertain tax positions or other contingencies;
the effect of legal and regulatory proceedings, as well as restrictions imposed on us, our operations, or our representatives by U.S. and foreign governments;
adverse changes in federal, state, local and international tax legislation or policies, including with respect to transfer pricing and state aid, and adverse results of tax audits, assessments, or disputes; and
changes in market conditions or governmental regulations relating to our pension and postretirement obligations.
New risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risks on our business. Accordingly, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any public statements or disclosures by the Company following this report that modify or impact any of the forward-looking statements contained in or accompanying this report will be deemed to modify or supersede such outlook or other forward-looking statements in or accompanying this report.
The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the Company (such as in our other filings with the SEC or in company press releases) for other factors that may cause actual results to differ materially from those projected by the Company. Please refer to Part I. Item 1A., Risk Factors, of the 20152016 Form 10-K for additional information regarding factors that could affect our results of operations, financial condition and cash flow.
Non-GAAP Financial Measures
The Company uses non-GAAP financial operating measures in this Quarterly Report, including: (i) currency neutral sales (which eliminates the effects that result from translating its international sales in U.S. dollars), (ii) adjusted gross margin (which excludes operational improvement initiative costs, acquisition-related costs, costs associated with product recalls and integration-related costs), (iii) adjusted operating profit and adjusted operating margin (which excludes legal charges/credits, acquisition-related costs, costs associated with product recalls, operational improvement initiative costs, restructuring charges)and other charges, gains on sales of fixed assets, integration-related costs and tax assessments), (iii)(iv) adjusted selling and administrative expenses (which excludes acquisition-related costs, tax assessments, integration-related costs and legal charges/credits) and (iv)(v) adjusted effective tax rate (which excludes legal charges/credits, acquisition-related costs, costs associated with product recalls, operational improvement initiative costs, restructuring and restructuring charges)other charges, gains on sales of fixed assets, integration-related costs, tax assessment and CTA realization). The Company also provides the non-GAAP measures adjusted EBITDA (which excludes certain specified items and non-cash items as set forth in the Company’s debt agreements) and net debt (which is adjusted for deferred gain on interest rate swaps and cash and cash equivalents) solely for the purpose of providing information on the extent to which the Company is in compliance with debt covenants contained in its debt agreements.
We have included eachprovide these metrics because they are used by management as one means by which we assess our financial and operational performance and are also frequently used by analysts, investors and other interested parties in providing period to period comparisons of our operational performance. In addition, we believe that these non-GAAP measures, when used as supplements to GAAP measures of performance, are helpful to management and investors in orderevaluating the effectiveness of our business strategies and to provide additional information regardingcompare our underlying operating results and comparable year-over-year performance.performance relative to our peers. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. In discussing our historical

31


Currency neutral sales, adjusted gross margin, adjusted operating profit, adjusted operating margin, adjusted selling and expected future resultsadministrative expenses and financial condition, we believe it is meaningfuladjusted effective tax rate should not be considered in isolation or as substitutes for investors to be made aware of and to be assisted in a better understanding of, on a period-to-period comparable basis, financial amounts both including and excluding these identified items, as well as the impact of exchange rate fluctuations. We believe such additional non-GAAP information provides investors with an overall perspective of the period-to-period performanceanalysis of our business. In addition, management internally reviews each of these non-GAAP measures to evaluate performance on a comparative period-to-period basis in terms of absolute performance, trendsresults under GAAP and expected future performance with respect to our business. A material limitation of these non-GAAP measures is that such measures do not reflect actual GAAP amounts. We compensate for such limitations by using these measures as one of several metrics, including GAAP measures. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.

A. Items Impacting Comparability

Three Months Ended September 30, 2016
 Adjusted Gross Profit
Reported (GAAP) Restructuring and Other Charges (a) Operational Improvement Initiative Costs (b) Adjusted (Non-GAAP)
Gross profit346,268
 190
 791
 347,249

 Adjusted Selling and Administrative Expenses
Reported (GAAP) Operational Improvement Initiative Costs (b) Acquisition and Related Costs (c) Legal Charges/Credits (d) Adjusted (Non-GAAP)
Selling and Administrative Expenses152,046
 (11) (786) (25,000) 126,249

 Adjusted Operating Profit
Reported (GAAP) Restructuring and Other Charges (a) Operational Improvement Initiative Costs (b) Acquisition Related Costs (c) Legal Charges/Credits (d) Adjusted (Non-GAAP)
Operating profit124,339
 190
 802
 786
 25,000
 151,117

 Adjusted Net Income
Reported (GAAP) Restructuring and Other Charges (a) Operational Improvement Initiative Costs (b) Acquisition Related Costs (c) Legal Charges/Credits (d) Adjusted (Non-GAAP)
Income before taxes113,390
 190
 802
 786
 25,000
 140,168
Taxes on income (e)23,613
 36
 200
 276
 8,750
 32,875
Net income89,777
 154
 602
 510
 16,250
 107,293
____________________
(a) Accelerated depreciation costs related to restructuring initiatives.
(b) Accelerated depreciation costs in Asia.
(c) Transaction costs related to the acquisitioncompanies’ calculation of David Michael.
(d) Legal charge related to reserve for the ZoomEssence case.
(e) The tax effects are calculated based upon the specific rate of the applicable jurisdiction of the items.such metrics.















A. Reconciliation of Non-GAAP Metrics

Three Months Ended June 30, 2017
(DOLLARS IN THOUSANDS)Reconciliation of Gross Profit
 Reported (GAAP)Operational Improvement Initiative Costs (a)Acquisition and Related Costs (b)Integration related costs (c)FDA mandated product recall (h)Adjusted (Non-GAAP)
Gross profit$374,589
445
5,606
98
3,500
$384,238
32

(DOLLARS IN THOUSANDS)Reconciliation of Selling and Administrative Expenses
 Reported (GAAP)Acquisition and Related Costs (b)Integration related costs (c)Legal Charges/Credits (d)Tax Assessment (e)Adjusted (Non-GAAP)
Selling and administrative expenses$135,910
(672)(542)(1,000)19
$133,715

(DOLLARS IN THOUSANDS)Reconciliation of Operating Profit
 Reported (GAAP)Operational Improvement Initiative Costs (a)Acquisition Related Costs (b)Integration related costs (c)Legal Charges/Credits (d)Tax Assessment (e)Restructuring and Other Charges (f)Gain on Sale of Asset (g)FDA mandated product recall (h)Adjusted (Non-GAAP)
Operating profit$159,142
445
6,278
731
1,000
(19)791
(68)3,500
$171,800

(DOLLARS IN THOUSANDS)Reconciliation of Net Income
 Reported (GAAP)Operational Improvement Initiative Costs (a)Acquisition Related Costs (b)Integration related costs (c)Legal Charges/Credits (d)Tax Assessment (e)Restructuring and Other Charges (f)Gain on Sale of Asset (g)FDA mandated product recall (h)
Adjusted (Non-GAAP)
Income before taxes$142,040
445
6,278
731
1,000
(19)791
(68)3,500
$154,698
Taxes on income (i)$32,245
111
1,472
243
354
(7)(75)(22)1,238
$35,559
Net income$109,795
334
4,806
488
646
(12)866
(46)2,262
$119,139
____________________
(a) Represents accelerated depreciation and idle labor costs in Hangzhou, China.
(b) Represents the amortization of inventory "step-up" related to the acquisitions of David Michael, Fragrance Resources and PowderPure, included in Cost of goods sold and transaction costs related to the acquisitions of Fragrance Resources and PowderPure, included in Selling and administrative expenses.
(c) Represents costs related to the integration of the David Michael and Fragrance Resources acquisitions.
(d) Represents additional charge related to litigation settlement.
(e) Represents the reversal of a portion of the reserve for payment of a tax assessment related to commercial rent for prior periods.
(f) Represents severance costs related to the 2017 Productivity Program which were partially offset by the reversal of 2015 severance charges that were no longer needed.
(g) Represents gains on sale of assets.
(h) 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 of the Consolidated Financial Statements, 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.
(i) The income tax expense (benefit) on non-GAAP adjustments is computed in accordance with ASC 740 using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based on the applicable statutory tax rate for each jurisdiction in which such charges were incurred. For the second quarter of 2017, these non-GAAP adjustments were not subject to foreign tax credits or valuation allowances, but to the extent that such factors are applicable to any future non-GAAP adjustments we will take such factors into consideration in calculating the tax expense (benefit).



Three Months Ended SeptemberJune 30, 20152016
Adjusted Gross Profit
Reconciliation of Gross Profit
Reported (GAAP) Operational Improvement Initiative Costs (a) Acquisition and Related Costs (b) Adjusted (Non-GAAP)Reported (GAAP)Restructuring and Other Charges (a)Operational Improvement Initiative Costs (b)Adjusted (Non-GAAP)
347,126
 279
 2,465
 349,870
$365,641
182
831
366,654

 Adjusted Selling and Administrative Expenses
Reported (GAAP) Acquisition and Related Costs (b) Adjusted (Non-GAAP)
Selling and Administrative Expenses122,249
 (4,365) 117,884
(DOLLARS IN THOUSANDS)Reconciliation of Selling and Administrative Expenses
 Reported (GAAP)Acquisition and Related Costs (c)Legal Charges/Credits (d)Adjusted (Non-GAAP)
Selling and administrative expenses$132,784
(213)36
132,607

Adjusted Operating Profit
Reconciliation of Operating Profit
Reported (GAAP) Operational Improvement Initiative Costs (a) Acquisition Related Costs (b) Adjusted (Non-GAAP)Reported (GAAP)Restructuring and Other Charges (a)Operational Improvement Initiative Costs (b)Acquisition Related Costs (c)Legal Charges/Credits (d)Gain on Sale of Asset (e)Adjusted (Non-GAAP)
156,713
 279
 6,830
 163,822
$164,672
182
831
213
(36)(197)165,665

 Adjusted Net Income
Reported (GAAP) Operational Improvement Initiative Costs (a) Acquisition Related Costs (b) Adjusted (Non-GAAP)
Income before taxes142,899
 279
 6,830
 150,008
Taxes on income (c)36,452
 70
 829
 37,351
Net income106,447
 209
 6,001
 112,657
____________________
(a) Related to a partial plant closing in Asia.
(b) Transaction costs related to acquisitions (Ottens Flavors and Lucas Meyer) as well as expense related to the fair value step up of inventory on the Lucas Meyer acquisition.
(c) The tax effects are calculated based upon the specific rate of the applicable jurisdiction of the items.

Nine Months Ended September 30, 2016
 Adjusted Gross Profit
Reported (GAAP) Restructuring and Other Charges (a) Operational Improvement Initiative Costs (b) Acquisition Related Costs (c) Adjusted (Non-GAAP)
Gross profit1,072,117
 473
 1,890
 889
 1,075,369

 Adjusted Selling and Administrative Expense
Reported (GAAP) Operational Improvement Initiative Costs (b) Acquisition Related Costs (c) Legal Charges/Credits (d) Adjusted (Non-GAAP)
Selling and Administrative Expenses408,372
 (11) (1,146) (23,518) 383,697

 Adjusted Operating Income
Reported (GAAP) Restructuring and Other Charges (a) Operational Improvement Initiative Costs (b) Acquisition Related Costs (c) Legal Charges/Credits (d) Adjusted (Non-GAAP)
Operating profit456,034
 473
 1,901
 2,035
 23,518
 483,961


33


Adjusted Net Income
Reconciliation of Net Income
Reported (GAAP) Restructuring and Other Charges (a) Operational Improvement Initiative Costs (b) Acquisition Related Costs (c) Legal Charges/Credits (d) Adjusted (Non-GAAP)Reported (GAAP)Restructuring and Other Charges (a)Operational Improvement Initiative Costs (b)Acquisition Related Costs (c)Legal Charges/Credits (d)Gain on Sale of Asset (e)Adjusted (Non-GAAP)
420,337
 473
 1,901
 2,035
 23,518
 448,264
$152,050
182
831
213
(36)(197)$153,043
Taxes on income (e)(f)95,223
 90
 475
 542
 8,339
 104,669
$35,317
35
208
(102)(9)(65)$35,384
Net income325,114
 383
 1,426
 1,493
 15,179
 343,595
$116,733
147
623
315
(27)(132)$117,659
____________________
(a) Accelerated depreciation and severance costs related to restructuring initiatives.activities.
(b) Accelerated depreciation and severance costs in Asia.Hangzhou, China.
(c) Expense related to the fair value step up of inventory and additional transaction costs related to acquisition of Lucas Meyer as well asAdditional transaction costs related to the acquisition of David Michael.Lucas Meyer, included in Selling and administrative expenses.
(d) Includes legal chargePrincipally related to reserve for the ZoomEssence case as well as settlements due to favorable tax rulings in jurisdictions for which reserves were previously recorded for ongoing tax disputes.rulings.
(e) Principally related to gain on sale of property in Europe.
(f) The income tax expense (benefit) on non-GAAP adjustments is computed in accordance with ASC 740 using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based upon the specific rate ofon the applicable statutory tax rate for each jurisdiction in which such charges were incurred. For the second quarter of 2016, these non-GAAP adjustments were not subject to foreign tax credits or valuation allowances, but to the items.extent that such factors are applicable to any future non-GAAP adjustments we will take such factors into consideration in calculating the tax expense (benefit).

NineSix Months Ended SeptemberJune 30, 20152017
Adjusted Gross Profit
Reconciliation of Gross Profit
Reported (GAAP) Operational Improvement Initiative Costs (b) Acquisition Related Costs (c) Adjusted (Non-GAAP)Reported (GAAP)Operational Improvement Initiative Costs (a)Acquisition and Related Costs (b)Integration related costs (c)FDA mandated product recall (i)Adjusted (Non-GAAP)
1,038,443
 841
 3,309
 1,042,593
$739,255
1,066
10,908
186
3,500
$754,915

 Adjusted Selling and Administrative Expense
Reported (GAAP) Acquisition Related Costs (c) Adjusted (Non-GAAP)
Selling and Administrative Expenses372,267
 (10,587) 361,680
(DOLLARS IN THOUSANDS)Reconciliation of Selling and Administrative Expenses
 Reported (GAAP)Acquisition and Related Costs (b)Integration related costs (c)Legal Charges/Credits (d)Tax Assessment (e)Adjusted (Non-GAAP)
Selling and administrative expenses$276,240
(4,158)(1,485)(1,000)(5,331)$264,266



Adjusted Operating Income
Reconciliation of Operating Profit
Reported (GAAP) Restructuring and Other Charges (a) Operational Improvement Initiative Costs (b) Acquisition Related Costs (c) Adjusted (Non-GAAP)Reported (GAAP)Operational Improvement Initiative Costs (a)Acquisition Related Costs (b)Integration related costs (c)Legal Charges/Credits (d)Tax Assessment (e)Restructuring and Other Charges (f)Gain on Sale of Asset (g)FDA mandated product recall (i)Adjusted (Non-GAAP)
467,328
 (170) 841
 13,896
 481,895
$296,578
1,066
15,066
1,923
1,000
5,331
10,934
(89)3,500
$335,309

Adjusted Net Income
Reconciliation of Net Income
Reported (GAAP) Restructuring and Other Charges (a) Operational Improvement Initiative Costs (b) Acquisition Related Costs (c) Tax Settlements (d) Adjusted (Non-GAAP)Reported (GAAP)Operational Improvement Initiative Costs (a)Acquisition Related Costs (b)Integration related costs (c)Legal Charges/Credits (d)Tax Assessment (e)Restructuring and Other Charges (f)Gain on Sale of Asset (g)CTA Realization (h)FDA mandated product recall (i)Adjusted (Non-GAAP)
436,286
 (170) 841
 13,896
 —
 450,853
$280,527
1,066
15,066
1,922
1,000
5,331
10,934
(89)(12,217)3,500
$307,040
Taxes on income (e)(j)96,206
 (60) 210
 1,879
 10,478
 108,713
$54,968
266
4,610
606
354
1,885
2,892
(29)—
1,238
$66,790
Net income340,080
 (110) 631
 12,017
 (10,478) 342,140
$225,559
800
10,456
1,316
646
3,446
8,042
(60)(12,217)2,262
$240,250
____________________
(a) CostsRepresents accelerated depreciation and idle labor costs in Hangzhou, China.
(b) Represents the amortization of inventory "step-up" related to the acquisitions of David Michael, Fragrance Ingredients Rationalization.
(b) Related to plant closingsResources and PowderPure, included in EuropeCost of goods sold and partial closing in Asia.
(c) Transactiontransaction costs related to the acquisitions (Ottens Flavorsof Fragrance Resources and Lucas Meyer) as well as expensePowderPure, included in Selling and administrative expenses.
(c) Represents costs related to the fairintegration of the David Michael and Fragrance Resources acquisitions.
(d) Represents additional charge related to litigation settlement.
(e) Represents the reserve for payment of a tax assessment related to commercial rent for prior periods.
(f) Represents severance costs related to the 2017 Productivity Program which were partially offset by the reversal of 2015 severance charges that were no longer needed.
(g) Represents gains on sale of assets.
(h) Represents the release of CTA related to the liquidation of a foreign entity.
(i) Represents an estimate of the Company's incremental direct costs and customer reimbursement obligations, in excess of the Company's sales value step upof 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 of the Consolidated Financial Statements, 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.
(j) The income tax expense (benefit) on non-GAAP adjustments is computed in accordance with ASC 740 using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based on the applicable statutory tax rate for each jurisdiction in which such charges were incurred, except for those items which are non-taxable for which the tax expense (benefit) was calculated at 0%. For the first six months of 2017, these non-GAAP adjustments were not subject to foreign tax credits or valuation allowances, but to the extent that such factors are applicable to any future non-GAAP adjustments we will take such factors into consideration in calculating the tax expense (benefit).

Six Months Ended June 30, 2016
(DOLLARS IN THOUSANDS)Reconciliation of Gross Profit
 Reported (GAAP)Restructuring and Other Charges (a)Operational Improvement Initiative Costs (b)Acquisition and Related Costs (c)Adjusted (Non-GAAP)
Gross profit$725,849
283
1,099
889
728,120



(DOLLARS IN THOUSANDS)Reconciliation of Selling and Administrative Expenses
 Reported (GAAP)Acquisition and Related Costs (c)Legal Charges/Credits (d)Adjusted (Non-GAAP)
Selling and Administrative Expenses$256,327
(360)1,482
$257,449

(DOLLARS IN THOUSANDS)Reconciliation of Operating Profit
 Reported (GAAP)Restructuring and Other Charges (a)Operational Improvement Initiative Costs (b)Acquisition Related Costs (c)Legal Charges/Credits (d)Gain on Sale of Asset (e)Adjusted (Non-GAAP)
Operating profit$334,604
283
1,099
1,249
(1,482)(2,910)332,843

(DOLLARS IN THOUSANDS)Reconciliation of Net Income
 Reported (GAAP)Restructuring and Other Charges (a)Operational Improvement Initiative Costs (b)Acquisition Related Costs (c)Legal Charges/Credits (d)Gain on Sale of Asset (e)Adjusted (Non-GAAP)
Income before taxes$306,947
283
1,099
1,249
(1,482)(2,910)$305,186
Taxes on income (f)$71,610
54
275
266
(411)(637)$71,157
Net income$235,337
229
824
983
(1,071)(2,273)$234,029
____________________
(a) Accelerated depreciation related to restructuring activities.
(b) Accelerated depreciation and severance costs in Hangzhou, China.
(c) Expense related to the amortization of inventory for both acquisitions.step-up, included in Cost of goods sold, and additional transaction costs related to the acquisition of Lucas Meyer, included in Selling and administrative expenses.
(d) Settlements due to favorable tax rulings in jurisdictions for which reserves were previously recorded for ongoing tax disputes.
(e) Principally related to gain on sale of property in Europe.
(f) The income tax expense (benefit) on non-GAAP adjustments is computed in accordance with ASC 740 using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based upon the specific rate ofon the applicable statutory tax rate for each jurisdiction in which such charges were incurred. For the first six months of 2016, these non-GAAP adjustments were not subject to foreign tax credits or valuation allowances, but to the items.


34

extent that such factors are applicable to any future non-GAAP adjustments we will take such factors into consideration in calculating the tax expense (benefit).

B. Foreign Currency Reconciliation                            
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
Operating Profit:    
% Change - Reported (GAAP)(21)% 3% (2)% 1%(3)% 11% (11)% 7%
Items impacting comparability (1)
13% 4% 3% 2%7% (4)% 12% (2)%
% Change - Adjusted (Non-GAAP)(8)% 7% —% 3%4% 7% 1% 5%
Currency Impact4% 3% 3% 6%3% —% 4% 2%
% Change Year-over-Year - Currency Neutral Adjusted (Non-GAAP)**(4)% 10% 3% 9%6%*7% 5% 7%
_______________________ 
(1) Includes $26.8 million of legal charges, acquisition-related, operational improvement initiative and restructuring costs and $7.1$12.7 million of acquisition-related and operational improvement initiative costs, for the three months ended September 30, 2016 and September 30, 2015, respectively. Includes $27.9 million ofcosts associated with product recalls, legal charges, acquisition-related, operational improvement initiative and restructuring, costs and $14.6 million of acquisition-relatedintegration-related and operational improvement initiative costs as well as gains on sales of fixed assets and $1.0 million related to operational improvement initiative, acquisition-relation and restructuring costs which were partially offset by gains on sales of fixed assets and a reversalfavorable legal settlement for the three months ended June 30, 2017 and June 30, 2016, respectively. Includes $38.7 million consisting of acquisition-related costs, costs associated with product recalls, legal charges, restructuring, integration-related and operational improvement initiative costs as well as gains on sales of fixed assets and excludes a benefit of $1.8 million related to gains on sales of fixed assets and a favorable legal settlement, which were only partially offset by acquisition-related, operational improvement initiative and restructuring costs for the ninesix months ended SeptemberJune 30, 20162017 and SeptemberJune 30, 2015,2016, respectively.
** Currency neutral amount is calculated by translating prior year amounts at the exchange rates used for the corresponding 20162017 period. Currency neutral operating profit also eliminates the year-over-year impact of cash flow hedging.
* The sum of these items does not foot due to rounding.


C. Acquisition Related Intangible Asset Amortization

The Company tracks the amount of amortization recorded on recent acquisitions in order to monitor its progress with respect to its Vision 2020 goals. The following amounts were recorded with respect to recent acquisitions:                
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(DOLLARS IN THOUSANDS)2016 2015 2016 2015
(DOLLARS IN MILLIONS)2017 2016 2017 2016
Amortization Expense:  
PowderPure$0.6 $— $0.6 $—
Fragrance Resources1.5 — 2.8 —
David Michael1.1 — 1.7 —
Lucas Meyer1.9 1.7 3.8 4.3
Ottens Flavors$1.6 $1.8 $4.8 $3.01.6 1.6 3.1 3.2
Lucas Meyer2.0 1.7 6.3 1.7



35


Item 3. Quantitative and Qualitative Disclosures about Market Risk
There are no material changes in market risk from the information provided in our 20152016 Form 10-K.
Item 4. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, have evaluated the effectiveness of our 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 Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
We have established controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the principal executive officer and the principal financial officer, to allow timely decisions regarding required disclosure.
The Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION
Item 1.
Item 1. Legal Proceedings
We are subject to various claims and legal actions in the ordinary course of our business.
Tax Claims
The Spanish tax authorities alleged claims for a capital tax and the Appellate Court rejected one of the two bases upon which we based our capital tax position. On January 22, 2014, we filed an appeal and in order to avoid future interest costs in the event our appeal was unsuccessful, we paid Euro 9.8 million ($11.2 million, representing the principal amount) during the first quarter of 2014. On February 24, 2016, we received a favorable ruling on our appeal from the Spanish Supreme Court which overruled a lower court ruling. As a result of this decision, we reversed the previously recorded provision of Euro 9.8 million ($10.5 million) for the year ended December 31, 2015. During 2016, we recorded additional income of $2.3 million related to the finalization of amounts received from the authorities. This amount has been principally reflected as a reduction of administrative expense.

Environmental
Over the past 20 years, various federal and state authorities and private parties have claimed that we are a Potentially Responsible Party (“PRP”) as a generator of waste materials for alleged pollution at a number of waste sites operated by third parties located principally in New Jersey and have sought to recover costs incurred and to be incurred to clean up the sites.
We have been identified as a PRP at eight facilities operated by third parties at which investigation and/or remediation activities may be ongoing. We analyze our potential liability on at least a quarterly basis. We accrue for environmental liabilities when they are probable and estimable. We estimate our share of the total future cost for these sites to be less than $5 million.
While joint and several liability is authorized under federal and state environmental laws, we believe the amounts we have paid and anticipate paying in the future for clean-up costs and damages at all sites are not material and will not have a material adverse effect on our financial condition, results of operations or liquidity. This assessment is based upon, among other things, the involvement of other PRPs at most of the sites, the status of the proceedings, including various settlement agreements and consent decrees, and the extended time period over which payments will likely be made. There can be no assurance, however, that future events will not require us to materially increase the amounts we anticipate paying for clean-up costs and damages at these sites, and that such increased amounts will not have a material adverse effect on our financial condition, results of operations or cash flows.
Other

36


InAs previously disclosed, in March 2012, ZoomEssence, Inc. filed a complaint against the Company in the U.S. District Court for the District of New Jersey alleging trade secret misappropriation, breach of contract and unjust enrichment in connection with certain spray dry technology disclosed to the Company. ZoomEssence is seekingsought an injunction and monetary damages. ZoomEssence initially sought a temporary restraining order and preliminary injunction, but the Court denied these applications in an order entered on September 27, 2013, finding that ZoomEssence had not demonstrated a likelihood of success on the merits of its claims. OnIn November 3, 2014, ZoomEssence amended its complaint against the Company to include allegations of breach of the duty of good faith and fair dealing, fraud in the inducement, and misappropriation of confidential and proprietary information. On November 13, 2014, the Company filed a counterclaim against ZoomEssence alleging trade secret misappropriation, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, misappropriation of confidential and proprietary information, common law unfair competition, tortious interference with contractual relations, and conversion. During the thirdsecond quarter of 2016,2017, the Court stayedCompany and ZoomEssence mutually agreed to settle all claims and counterclaims. The parties agreed to dismiss their claims against one another, with prejudice and without any admission of liability or wrongful conduct, to avoid any further expense and disruption from the caselitigation. The complaint was dismissed, with prejudice, on July 5, 2017. Under the settlement agreement, the Company made a one-time payment to ZoomEssence of $56 million during the second quarter of 2017 and directed the parties to engage in mediation. The mediation, which took place in October 2016, did not result in a resolution of the litigation; we cannot reliably predict the timing of a trial, but it is expected that it would take place in 2017. Based on information available and expert assessment of potential exposure,exchanged full mutual releases. Accordingly, the Company recorded an additional reservecharge of $25$1 million during the three months ended September 30, 2016.second quarter of 2017.


We are also a party to other litigations arising in the ordinary course of our business. We do not expect the outcome of these cases, singly or in the aggregate, to have a material effect on our consolidated financial condition.
 
Item 2.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
The table below reflects shares of common stock we repurchased during the thirdsecond quarter of 20162017. 
Period
Total Number of
Shares
Repurchased (1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Program
 
Approximate Dollar Value
of Shares That May Yet
be Purchased Under the
Program
July 1 - 31, 201659,373
 $130.10
 59,373
 $157,301,842
August 1 - 31, 201655,770
 134.65
 55,770
 149,792,680
September 1 - 30, 201652,164
 138.01
 52,164
 142,593,302
Total167,307
 $134.08
 167,307
 $142,593,302
Period
Total Number of
Shares
Repurchased (1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Program
 
Approximate Dollar Value
of Shares That May Yet
be Purchased Under the
Program
April 1 - 30, 201742,654 $133.63 42,654
 $65,986,090
May 1 - 31, 201737,372 136.45 37,372
 60,886,514
June 1 - 30, 201734,904 137.50 34,904
 56,087,164
Total114,930 $135.72 114,930
 $56,087,164
 
(1)Shares were repurchased pursuant to the repurchase program originally announced in December 2012 and amended in August 2015 (i) to increase from $250 million to $500 million the total purchase price of shares that may be repurchased under the program and (ii) to extend the program through December 31, 2017. Authorization of the repurchase program may be modified, suspended, or discontinued at any time.

Item 6.
Item 6. Exhibits
4.7Second Supplemental Indenture, dated as of May 18, 2017, among International Flavors & Fragrances Inc. and U.S. Bank National Association, as trustee (including the form of Notes), incorporated by reference to Exhibit 4.7 to the Registrant's Current Report on Form 8-K filed on May 18, 2017.
12Statement re: Computation of Ratios
31.1Certification of Andreas Fibig pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Richard A. O'Leary pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32Certification of Andreas Fibig and Richard A. O'Leary pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extensions Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase


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:August 8, 2017By:/s/ Andreas Fibig
Andreas Fibig
Chairman of the Board and Chief Executive Officer
Dated:August 8, 2017By:/s/ Richard A. O'Leary
Richard A. O'Leary
Executive Vice President and Chief Financial Officer


EXHIBIT INDEX
NumberDescription
12Statement re: Computation of Ratios
31.1  Certification of Andreas Fibig pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2  Certification of Richard A. O'Leary pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32  Certification of Andreas Fibig and Richard A. O'Leary pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002.
101.INS  XBRL Instance Document
101.SCH  XBRL Taxonomy Extensions Schema
101.CAL  XBRL Taxonomy Extension Calculation Linkbase
101.DEF  XBRL Taxonomy Extension Definition Linkbase
101.LAB  XBRL Taxonomy Extension Label Linkbase
101.PRE  XBRL Taxonomy Extension Presentation Linkbase

43
37


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 7, 2016By:/s/ Andreas Fibig
Andreas Fibig
Chairman of the Board and Chief Executive Officer
Dated:November 7, 2016By:/s/ Richard A. O'Leary
Richard A. O'Leary
Executive Vice President and Chief Financial Officer

38


EXHIBIT INDEX
NumberDescription
31.1Certification of Andreas Fibig pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Richard A. O'Leary pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32Certification of Andreas Fibig and Richard A. O'Leary pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extensions Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase

39