Acquisitions

9 Months Ended

Sep. 30, 2019

ACQUISITIONS

2019 Acquisition Activity

During the second quarter of 2019, the Company acquired the remaining 50% interest in an equity method investee located in Canada. The Company previously held an investment of $33 million in the entity and recognized a gain of approximately $3 million on the transaction within Other income, net in the Consolidated Statement of Income and Comprehensive (Loss) Income representing the adjustment of its historical investment to its fair value. The goodwill is not deductible for income tax purposes. The purchase of the additional interest increased the Company's ownership of the investee to 100%, and the acquired entity is managed under the Frutarom segment. The purchase price for the remaining 50% was approximately $37 million, including cash and an accrual for the amount expected to be paid in contingent consideration. The Company began to consolidate the results of the acquired entity from the date on which it acquired the remaining 50% interest during the second quarter of 2019. Goodwill of approximately $33 million and intangible assets of $24 million were recorded in connection with the acquisition. The purchase price allocation is preliminary and is expected to be completed within the measurement period.

During the first quarter of 2019, the Company acquired 70% of a company in Europe and increased its ownership of an Asian company from 49% to 60% after receipt of previously pending regulatory approvals. The two acquired entities, which manufacture flavor products, are managed under the Frutarom segment. The total purchase price for the acquisitions was $52 million, excluding cash acquired and including $19 million of contingent consideration and deferred payments. The preliminary purchase price allocations have been performed and resulted in goodwill of approximately $56 million and intangible assets of $18 million. The purchase price allocations are preliminary and are expected to be completed within the measurement period.

Pro forma information has not been presented as the entities acquired in 2019 are not material.

Frutarom

On October 4, 2018, the Company completed its acquisition of 100% of the equity of Frutarom Industries Ltd. (“Frutarom”).

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 was finalized as of the end of the third quarter of 2019. This involved finalizing the valuation of fixed assets, goodwill and intangible assets (trade names, product formulas, customer relationships and favorable/unfavorable leases and the related estimated useful lives). Additionally, this also involved finalizing the projected combined future tax rate applied to the valuation of assets, which impacted the valuation of goodwill and intangible assets.

The following table summarizes the fair values of the assets acquired and liabilities assumed as of October 4, 2018, showing both the preliminary and final purchase price allocations:



(IN THOUSANDS)	As reported in the fourth quarter of 2018			Measurement period adjustments			As reported in the third quarter of 2019
Cash and cash equivalents	$	140,747					$	140,747
Other current assets	699,627			$	(25,706	)	673,921
Identifiable intangible assets	2,690,000			(21,700		)	2,668,300
Other non-current assets	353,710			58,401			412,111
Equity method investments	25,791			10,439			36,230
Current liabilities	(311,325		)	(7,190		)	(318,515		)
Debt assumed	(77,037		)				(77,037		)
Other liabilities	(632,488		)	(39,730		)	(672,218		)
Redeemable noncontrolling interest	(97,510		)	(5,392		)	(102,902		)
Noncontrolling interest	(3,700		)				(3,700		)
Goodwill	4,243,079			30,878			4,273,957
Total Purchase Consideration	$	7,030,894					$	7,030,894

The fair value purchase price allocation of the assets and liabilities acquired in the acquisition of Frutarom as reported in the fourth quarter of 2018 was updated during the nine months ended September 30, 2019 primarily due to: (i) a $19.0 million decrease in inventory, (ii) a $7.4 million decrease in trade receivables, (iii) a $21.7 million decrease in the fair value of identifiable intangible assets (principally customer relationships and product formulas and arising from the updated valuations of fixed assets), (iv) a $58.4 million increase primarily related to property, plant and equipment (related to certain entities), (v) a $10.4 million increase in the fair value of equity method investments, (vi) a $1.5 million increase to the noncurrent portion of earn-outs, (vii) a $14.4 million increase to deferred income tax liabilities, (viii) an $18.9 million increase to reserves for uncertain tax positions, (ix) a $5.0 million increase to environmental remediation liabilities, and (x) a $5.4 million increase to redeemable noncontrolling interest. The cumulative impact of the adjustments resulted in a $30.9 million increase to goodwill.

The measurement period adjustments did not have a material impact on the Company's Net income attributable to IFF stockholders for the first, second, or third quarters of 2019.

The components of acquired intangible assets with finite lives that have been recorded are as follows:



(IN THOUSANDS)	Estimated Amounts		Estimated Useful Life
Product formula	$	290,000	10 years
Customer relationships	2,230,000		18 to 20 years
Trade names	140,000		23 years
Favorable/Unfavorable Leases, net	8,300		5 to 15 years
Total	$	2,668,300

During the third quarter of 2019, in connection with the determination of the final purchase price allocation, the Company also finalized its determination of the reporting units for the Frutarom operating segment. The reporting units identified were as follows: (i) Taste; (ii) Savory Solutions; (iii) Inclusions; (iv) Fine Ingredients; and (v) Natural Product Solutions.

In connection with the purchase price allocation, numerous assumptions were made including those related to future revenue growth, the achievement of synergy targets and the applicable rate to use in the discounted cash flows that form a key part of the valuation. The recoverability of the goodwill is principally dependent on future growth in revenues and from synergies related to plant and supply chain consolidation. The goodwill may be impaired if the Company fails to achieve the anticipated growth in revenues, the expected synergies or if applicable interest rates increase.

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, 2018. 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, 2018, nor are they indicative of future results. The unaudited pro forma financial information for the three and nine months ended September 30, 2018 included the pre-acquisition results of Frutarom for that period.

The unaudited pro forma results were as follows:



(IN THOUSANDS)	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Unaudited pro forma net sales	$	1,269,452	$	3,906,506
Unaudited pro forma net income attributable to the Company	51,602		266,491

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, 2018, including amortization charges for acquired intangibles assets, amortization of inventory step-up, 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.