ACQUISITIONS

Frutarom

On October 4, 2018 (the "Closing"), the Company completed its acquisition of Frutarom Industries Ltd. (“Frutarom”). The Company acquired 100% of the equity of Frutarom pursuant to a definitive agreement and plan of merger entered into on May 7, 2018 ("Merger Agreement"). Frutarom is an Israeli company that, through its subsidiaries, develops, produces and markets flavors and fine ingredients used in manufacturing food, beverages, flavors and fragrances, pharma/nutraceuticals, cosmetics and personal care products, including natural products. The acquisition was made in order to strengthen IFF's customer base, its capabilities and geographic reach, and is expected to result in more exposure to numerous end markets, including those with a focus on naturals and health and wellness.

The acquisition was accounted for using the purchase method of accounting in accordance with ASC Topic 805, Business Combinations, with IFF identified as the acquirer. As a result of the acquisition, Frutarom's assets, liabilities and results of operations were included in the Company’s financial statements from the acquisition date. Frutarom contributed net sales of $359.6 million for the year ended December 31, 2018 and a segment profit of $27.4 million for the year ended December 31, 2018.

Purchase Price

The following table summarizes the aggregate purchase price consideration paid to acquire Frutarom (in thousands, except share and per share data):



Frutarom’s shares outstanding as of the Closing	59,576,323
Cash consideration per share	71.19
Total cash paid to shareholders of Frutarom	$	4,241,238

Cash paid to vested stock option holders	19,229
Cash in escrow for unvested stock option holders	7,048
Cash paid for closing dividend	21,065
Cash in lieu of fractional shares	15
Cash portion of the purchase consideration	$	4,288,595

Frutarom’s shares outstanding as of the Closing	59,576,323
Exchange ratio	0.249
Total common shares of IFF issued	14,834,504
IFF’s share price as of the Closing	137.39
Total equity consideration paid to shareholders of Frutarom	2,038,113
Equity consideration paid to vested stock Frutarom option holders (representing 67,046 shares)	9,211
Equity portion of purchase consideration	$	2,047,324

Repayment of existing credit facilities of Frutarom	694,975

Total purchase consideration	$	7,030,894

At the Closing, each issued and outstanding Frutarom ordinary share was exchanged for $71.19 in cash and 0.2490 of a share of the Company's common stock (the "Merger Consideration").

As part of the acquisition, each Frutarom stock option and restricted share unit (“RSU”) that was vested at the Closing was canceled in exchange for the right to receive Merger Consideration, reduced by the exercise price per share for each vested option. Upon Closing, IFF paid $19.2 million in cash and issued 67,046 shares to the holders of vested options and RSUs.

Frutarom stock options and RSUs that were unvested at the Closing were canceled in exchange for the right to receive cash equivalent to the Merger Consideration reduced by the exercise price per share for each unvested option. These awards require the option holders to continue employment until the end of the original vesting period. If an employee is terminated and the right to such options has not been forfeited, the employee is entitled to a pro-rata portion based on the vesting period that has been completed at the termination date. The Company funded a separate escrow account for the amount related to the unvested awards in the amount of $13.6 million. This amount is designated as Restricted cash on the Consolidated Balance Sheet. The Company attributed the fair value of $7.0 million of the unvested awards to pre-acquisition services and the remainder will be recognized in the post-acquisition period over the required remaining service period.

Pursuant to the Merger Agreement, the Frutarom shareholders were entitled to a closing dividend. The per share dividend was equal to the product of (a) aggregate amount of per share cash dividends declared by IFF with a record date occurring on or after the date of the Merger Agreement and prior to closing of the Merger, multiplied by, (b) Frutarom’s shares outstanding as of the Closing multiplied by the exchange ratio of 0.2490. The closing dividend payment of $21.1 million has been included in the total purchase consideration amount.

A portion of Frutarom’s existing debt was repaid concurrent with the Closing. Frutarom's debt, which was not legally assumed by IFF but was paid at Closing, was approximately $695.0 million.

To finance the acquisition, the Company used cash on hand and borrowed approximately $3.3 billion of additional debt, consisting of $2.8 billion of senior unsecured notes, $350.0 million in term loans and $139.5 million of tangible equity units. See Note 10 for further details.

The Company issued 14.9 million shares as a portion of the purchase consideration resulting in former Frutarom shareholders holding approximately 14% of the Company's outstanding common stock as of the Closing. Additionally, the Company issued 16,500,000 TEUs in an underwritten public offering for net proceeds of approximately $665.1 million.

The Company acquired pre-existing contingent consideration arrangements that are subject to change based on future earnings. Amounts are payable in 2019, 2020, and 2021. The fair value of the contingent consideration has been recorded on the opening balance sheet in the amount of $43.6 million. The liability will be periodically re-assessed and any changes will be recorded in the consolidated statement of operations.

As part of several acquisitions made by Frutarom, noncontrolling interest holders of the acquired entities were granted options to sell their respective interests to Frutarom (“put option”) and Frutarom held a mirroring option to buy the interests on the same terms (“call option”). IFF determined that the put options cannot be separated from the noncontrolling interests and the combination of a noncontrolling interest and its redemption feature require each noncontrolling interest to be classified as a redeemable noncontrolling interest. The redeemable noncontrolling interests were initially measured at fair value as of the acquisition date using a discounted cash flow approach, inclusive of the put and call provisions.

Purchase Price Allocation

The Company allocated the purchase consideration to the tangible net assets and identifiable intangible assets acquired based on estimated fair values at the acquisition date, and recorded the excess of consideration over the fair values of net assets acquired as goodwill. The purchase price allocation is preliminary and is subject to change. The Company is currently finalizing the valuation of property, plant and equipment (including estimated useful lives), goodwill, intangible assets (trade names, product formulas, customer relationships and favorable/unfavorable leases, including estimated useful lives), and leases, in addition to ensuring all other liabilities and contingencies have been identified and recorded. Additionally, the Company is finalizing the projected combined future tax rate to be applied to the valuation of assets, which could impact the valuation of goodwill and intangible assets. The determination of the fair value of assets and liabilities will be finalized as soon as the valuation is completed which is expected to be during 2019.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed (in thousands).



Cash and cash equivalents	$	140,747
Other current assets	699,627
Identifiable intangible assets	2,690,000
Other assets	353,710
Equity method investments	25,791
Current liabilities	(311,325		)
Debt assumed	(77,037		)
Other liabilities	(632,488		)
Redeemable noncontrolling interest	(97,510		)
Noncontrolling interest	(3,700		)
Excess attributable to Goodwill	4,243,079
Total Purchase Consideration	$	7,030,894

Accounts receivable and other miscellaneous receivables were recorded at their approximate fair value based on Frutarom’s expected collections. Finished goods and work-in-process inventory was valued using a net realizable value approach, including profit allowance, which resulted in a step-up of $31.5 million. The preliminary fair value of property, plant and equipment will be determined using a combination of the income approach, the preliminary market approach and the cost approach. The cost approach is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors.

Other liabilities includes a deferred tax liability of $45.0 million on deemed repatriation as the Company plans to repatriate certain funds to the U.S. and will be required to pay foreign withholding and other taxes, including state taxes, during the period when such repatriation occurs. This balance is preliminary and will be refined through the purchase accounting measurement period.

The Company has recognized $4.2 billion of goodwill, which is attributable to expected synergies generated by the integration of Frutarom including cross-selling benefits as well as cost synergies. The goodwill has all been assigned to the Frutarom reporting unit. Approximately $87.3 million of the goodwill associated with the Frutarom acquisition is deductible for income tax purposes. Any changes in the estimated fair values of the assets acquired and liabilities assumed in the acquisition may change the amount of the purchase consideration allocated to goodwill.

The preliminary amounts of the components of intangible assets have been recorded as follows:



(IN THOUSANDS)	Estimated Amounts		Weighted-Average Useful Life
Intangible assets with finite lives:
Product formula	$	290,000	10 to 12 years
Customer relationships	2,260,000		18 to 23 years
Trade names	140,000		23 to 26 years
Total	$	2,690,000

Trade names and trademarks, product formulas, and customer relationships were valued using the relief from royalty method, or the multi-period excess earnings method, which are both variations of the income approach. Some of the more significant assumptions inherent in developing the valuations included the estimated net cash flows (including net sales, cost of goods sold, operating expenses, and contributory asset charges), royalty rates, attrition rates, and discount rates that appropriately reflect the risks inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends, as well as other factors. The assumptions used in the financial forecasts were determined by considering historical data as well as current and anticipated market conditions, industry growth rates, management plans, and market comparables. The intangible assets are being amortized on a straight-line basis over the respective useful lives.

Pro forma financial information

The following unaudited pro forma financial information presents the combined results of operations of IFF and Frutarom as if the acquisition had been completed as of the beginning of the prior fiscal year, or January 1, 2017. The unaudited pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on January 1, 2017, nor are they indicative of future results. The unaudited pro forma financial information for the year ended December 31, 2018 includes IFF results, including the post-acquisition results of Frutarom, since October 4, 2018, and pre-acquisition results of Frutarom for the period January 1, 2018 through October 3, 2018.

The unaudited pro forma results for the years ended December 31, 2018 and December 31, 2017 is as follows:



	Year Ended December 31,
(IN THOUSANDS)	2018		2017
Unaudited pro forma net sales	$	5,135,906	$	4,761,115
Unaudited pro forma net income attributable to the Company	474,498		240,784

The unaudited pro forma results for all periods presented include adjustments made to account for certain costs and transactions that would have been incurred had the acquisition been completed as of January 1, 2017, including amortization charges for acquired intangibles assets, adjustments for acquisition transaction costs, adjustments for depreciation expense for property, plant, and equipment, and adjustments to interest expense. These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above.

Other

The Company incurred acquisition-related costs of $156.7 million for the year ended December 31, 2018. This amount primarily consists of the following: $39.4 million of bridge loan commitment fees included in Interest expense; $34.9 million make whole payment on the Senior Notes - 2007 and $3.9 million realized loss on a fair value hedge included in Loss on extinguishment of debt; $12.5 million realized gain on a foreign currency derivative included in Other income; and $66 million of transaction costs included in Selling and administrative expenses.

TAA

On December 7, 2018, the Company completed the acquisition of 100% of the outstanding shares of The Additive Advantage, LLC ("TAA"), a privately-held manufacturing and licensing company with facilities in North America. The acquisition was accounted for under the purchase method. TAA was acquired to strengthen IFF’s position in delivery capability and technologies, and to advance the R&D delivery platform with printable encapsulation solutions.

The Company paid $14.5 million for this acquisition, which was funded from cash on hand. Additionally, the Company recorded an accrual of $6.9 million representing the current estimate of additional contingent consideration payable to the former owners of TAA determined using the scenario-based method. In addition, as part of the acquisition, the Company assumed a loan of $0.5 million that had been due to the Company from TAA. This amount was included in the purchase consideration.

The purchase consideration was allocated principally to identifiable intangible assets including $11.4 million to In-process research and development ("IPR&D") and approximately $10.4 million to goodwill (which is deductible for tax purposes). IPR&D represents acquired printing technology that had not been completed as of the acquisition date. The fair value of IPR&D was determined using the income approach. IPR&D will be tested for impairment going forward, and will only be amortized once technological feasibility has been established. The rate utilized to discount the net cash flows to their present value reflects the risk associated with the intangible asset and is benchmarked to the cost of equity. 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 applying the technology to the Company’s existing product portfolio.

The acquisition agreement contains a provision for the payment of certain milestone amounts, which will be expensed as incurred post-acquisition, with a maximum amount that will be paid out of $5.4 million, as they are contingent on continued employment, as well as achievement of milestones related to the IPR&D programs.

No pro forma financial information is presented as the acquisition was not material to the consolidated financial statements.

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 $54.6 million including $0.4 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 $48.0 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 $15.2 million of goodwill (which is deductible for tax purposes). Goodwill is the excess of the purchase price over the fair value of net assets acquired and represents 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, 2 years.

The purchase price allocation was completed in the first quarter of 2018. No material adjustments were made to the purchase price allocation since the preliminary valuation performed in the second quarter of 2017. The estimated amount of the contingent consideration payable was reduced to zero during 2018 and resulted in a decrease in administrative expense of approximately $1.3 million.

No pro forma financial information for 2017 or 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, Inc., Fragrance Resources GmbH, and Fragrance Resources SAS (collectively "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 €143.4 million (approximately $151.9 million) including approximately €13.7 million (approximately $14.4 million) of cash acquired for this acquisition, which was funded from existing resources including use of its revolving credit facility. Of the total paid, approximately €142.0 million (approximately $150.5 million) was paid at closing and an additional €1.4 million (approximately $1.5 million) was paid in connection with the finalization of the working capital adjustment. The purchase price exceeded the fair value of existing net assets by approximately $122.0 million. The excess was allocated principally to identifiable intangible assets including approximately $51.7 million related to customer relationships, approximately $13.6 million related to proprietary technology and trade name, and approximately $72.0 million of goodwill (which is not deductible for tax purposes) and approximately $15.3 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 was finalized in the fourth quarter of 2017. Certain measurement period adjustments were made subsequent to the initial purchase price allocation including adjustments related to the finalization of the purchase price, the allocation of certain intangibles and the calculation of applicable deferred taxes. The additional amortization of intangibles required as a result of the measurement period adjustments was not material.

No pro forma financial information for 2016 is presented as the acquisition was not material to the consolidated financial statements.

David Michael

On October 7, 2016, the Company completed the acquisition of 100% of the outstanding shares of David Michael & Company, Inc. ("David Michael"). The acquisition was accounted for under the purchase method. David Michael was acquired to strengthen the North American flavors business. The Company paid approximately $242.6 million (including $5.1 million of cash acquired) for this acquisition, which was funded from existing resources. The preliminary purchase price allocation was updated during the first quarter of 2017, resulting in a reduction in allocation of value to customer relationships. The related reduction in amortization expense was not material to the Consolidated Statement of Comprehensive Income. The purchase price allocation was finalized during the second quarter of 2017. Additionally, during the second quarter of 2017, the Company finalized the working capital adjustment and paid an additional $0.7 million. The purchase price exceeded the fair value of existing net assets by approximately $168.7 million. The excess was allocated principally to identifiable intangible assets including approximately $50.0 million related to customer relationships, approximately $8.4 million related to proprietary technology and trade name, and approximately $110.2 million of goodwill (which is deductible for tax purposes). Goodwill is the excess of the purchase price over the fair value of net assets acquired and represents synergies from the addition of David Michael to the Company's existing Flavors business. The intangible assets are being amortized over the following estimated useful lives: trade name, 2 years; proprietary technology, 5 years; and customer relationships, 18 - 20 years.

No pro forma financial information for 2016 is presented as the impact of the acquisition was immaterial to the Consolidated Statement of Comprehensive Income.