UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

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

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 o

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares outstanding as of July 23, 2010: 79,857,989

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERNATIONAL FLAVORS & FRAGRANCES INC.

(DOLLARS IN THOUSANDS)

(Unaudited)

		June 30,				December 31,
		2010				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	110,552			$	80,135
Trade receivables			484,492				454,528
Allowance for doubtful accounts			(8,496	)			(10,263	)
Inventories:
Raw materials			237,273				228,999
Work in process			9,041				9,173
Finished goods			208,294				206,805
Total Inventories			454,608				444,977
Deferred income taxes			66,493				55,002
Prepaid expenses and other current assets			115,971				103,687
Total Current Assets			1,223,620				1,128,066
Property, plant and equipment, at cost			1,234,109				1,265,885
Accumulated depreciation			(752,068	)			(764,592	)
			482,041				501,293
Goodwill			665,582				665,582
Intangible assets, net			51,870				54,948
Deferred income taxes			136,143				129,720
Other assets			167,626				165,165
Total Assets		$	2,726,882			$	2,644,774
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Bank borrowings and overdrafts and current portion of long-term debt		$	48,739			$	76,780
Accounts payable			155,056				161,027
Accrued payroll and bonus			59,576				49,022
Accrued taxes on income			29,190				1,913
Dividends payable			19,964				19,786
Restructuring and other charges			19,315				18,914
Other current liabilities			163,519				157,012
Total Current Liabilities			495,359				484,454
Other Liabilities:
Long-term debt			934,600				934,749
Deferred gains			52,576				54,884
Retirement liabilities			241,669				240,950
Other liabilities			154,647				157,827
Total Other Liabilities			1,383,492				1,388,410
Commitments and Contingencies (Note 13)
Shareholders’ Equity:
Common stock 12 1/2¢ par value; authorized 500,000,000 shares; issued 115,761,840 shares as of June 30, 2010 and December 31, 2009; and outstanding 79,860,012 and 79,157,393 shares as of June 30, 2010 and December 31, 2009			14,470				14,470
Capital in excess of par value			100,502				110,374
Retained earnings			2,430,322				2,339,205
Accumulated other comprehensive loss			(303,606	)			(270,974	)
Treasury stock, at cost - 35,901,828 shares as of June 30, 2010 and 36,604,447 shares as of December 31, 2009			(1,396,918	)			(1,424,072	)
Total Shareholders’ Equity			844,770				769,003
Noncontrolling interest			3,261				2,907
Total Shareholders’ Equity including noncontrolling interest			848,031				771,910
Total Liabilities and Shareholders’ Equity		$	2,726,882			$	2,644,774

See Notes to Consolidated Financial Statements

INTERNATIONAL FLAVORS & FRAGRANCES INC.

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(Unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Net sales		$	665,800			$	568,261			$	1,319,710			$	1,127,891
Cost of goods sold			380,799				340,347				764,501				677,912
Research and development expenses			55,844				44,248				108,475				91,578
Selling and administrative expenses			119,523				96,032				227,532				188,918
Restructuring and other charges			1,843				4,104				6,831				4,104
Interest expense			12,051				14,047				24,787				33,828
Other (income) expense, net			2,107				1,569				4,871				406
			572,167				500,347				1,136,997				996,746
Income before taxes on income			93,633				67,914				182,713				131,145
Taxes on income			26,481				19,831				51,772				35,866
Net income			67,152				48,083				130,941				95,279
Other comprehensive income:
Foreign currency translation adjustments			(24,820	)			43,393				(35,896	)			67,434
Gains (losses) on derivatives qualifying as hedges			(473	)			(385	)			(187	)			1,196
Pension and postretirement net liability adjustment			1,659				451				3,451				2,275
Comprehensive income		$	43,518			$	91,542			$	98,309			$	166,184
Net income per share — basic		$	0.84			$	0.61			$	1.65			$	1.21
Net income per share — diluted		$	0.83			$	0.60			$	1.63			$	1.20
Average number of shares outstanding — basic			79,188				78,352				78,978				78,273
Average number of shares outstanding — diluted			80,111				79,050				79,902				78,898
Dividends declared per share		$	0.25			$	0.25			$	0.50			$	0.50

See Notes to Consolidated Financial Statements

INTERNATIONAL FLAVORS & FRAGRANCES INC.

(DOLLARS IN THOUSANDS)

(Unaudited)

		Six Months Ended June 30,
		2010				2009
Cash flows from operating activities:
Net income		$	130,941			$	95,279
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization			40,221				38,263
Deferred income taxes			(14,737	)			7,165
Gain on disposal of assets			(1,845	)			(1,487	)
Equity based compensation			10,780				10,136
Changes in assets and liabilities:
Current receivables			(53,766	)			(61,681	)
Inventories			(30,384	)			47,268
Current payables			58,580				(27,461	)
Other assets			(21,818	)			(18,142	)
Other liabilities			9,668				(1,803	)
Net cash provided by operations			127,640				87,537
Cash flows from investing activities:
Additions to property, plant and equipment			(37,013	)			(18,545	)
Purchase of investments			(2,444	)			(1,882	)
Termination / maturity of net investment hedge			1,668				(13,604	)
Proceeds from disposal of assets			1,438				835
Net cash used in investing activities			(36,351	)			(33,196	)
Cash flows from financing activities:
Cash dividends paid to shareholders			(39,631	)			(39,338	)
Net change in bank borrowings and overdrafts			(33,637	)			(25,878	)
Proceeds from issuance of stock under stock-based compensation plans			14,674				1,507
Purchase of treasury stock			—				(1,967	)
Net cash used in financing activities			(58,594	)			(65,676	)
Effect of exchange rate changes on cash and cash equivalents			(2,278	)			(3,317	)
Net change in cash and cash equivalents			30,417				(14,652	)
Cash and cash equivalents at beginning of year			80,135				178,467
Cash and cash equivalents at end of period		$	110,552			$	163,815
Interest paid		$	26,614			$	40,436
Income taxes paid		$	30,715			$	24,002

See Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

These interim statements and management’s related discussion and analysis should be read in conjunction with the Consolidated Financial Statements and their related notes and management’s discussion and analysis of results of operations and financial condition included in our 2009 Annual Report on Form 10-K (“2009 Form 10-K”). These interim statements are unaudited. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. We have historically operated on a 52/53 week fiscal year ending on the Friday closest to the last day of the quarter. For ease of presentation, December 31 and June 30 are utilized consistently throughout this report and these financial statements and notes to represent the period-end date. In the opinion of our management, all adjustments, including normal recurring accruals, necessary for a fair presentation of the results for the interim periods have been made.

Note 1. Recent Accounting Pronouncements:

In January 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance revising certain disclosure requirements concerning fair value measurements. The guidance requires an entity to disclose separately significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and to disclose the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3, on a gross basis rather than a net basis. These new disclosure requirements were effective for our first quarter of 2010, except for the additional disclosure of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. We did not have any such transfers into and out of Levels 1 and 2 during the three months and six months ended June 30, 2010. We are currently evaluating the full impact of this guidance, but do not expect it to have a material impact on the disclosures in our Consolidated Financial Statements in future filings.

Note 2. Reclassifications:

Certain reclassifications and revisions have been made to the prior years’ financial statements to conform to the 2010 presentation. During 2009, the Company revised its method of reporting Research and Development (R&D) credits to be properly reflected as a reduction in R&D expense versus a reduction in income tax expense. The R&D revision increased the income tax expense for the three months and six months ended June 30, 2009 in the amounts of $2.8 million and $3.7 million, respectively. The 2009 revisions had no impact on net income.

Reclassifications, including their impact, on the Consolidated Statement of Income for the three months and six months ended June 30, 2009 were as follows: Cost of goods sold increased $0.2 million and $0.3 million, respectively; R&D decreased $1.7 million and $3.7 million, respectively; and Selling and Administrative increased $1.5 million and $3.4 million, respectively.

Note 3. 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 June 30,								Six Months Ended June 30,
(Shares in thousands)		2010				2009				2010				2009
Basic			79,188				78,352				78,978				78,273
Assumed dilution under stock plans			923				698				924				625
Diluted			80,111				79,050				79,902				78,898

Stock options and stock settled appreciation rights (“SSARs”) to purchase 249,000 shares and 1,913,000 shares were outstanding as of June 30, 2010 and June 30, 2009, respectively, but were not included in the computation of diluted net income per share for the respective periods since the impact was anti-dilutive.

We have issued shares of Purchased Restricted Stock (“PRS”) which contain nonforfeitable rights to dividends and thus are considered participating securities which are required to be included in the computation of basic and diluted earnings per share pursuant to the two-class method. We did not present the two-class method since the difference between basic and diluted net income per share for both common shareholders and PRS shareholders was less than $0.01 per share for each period and the number of PRS outstanding as of June 30, 2010 and 2009 was immaterial (approximately 0.6% of the total number of common shares outstanding). Net income allocated to such PRS was $0.4 million and $0.8 million during the three and six months ended June 30, 2010, respectively and $0.3 million and $0.6 million during the three and six months ended June 30, 2009, respectively.

Note 4. Restructuring and Other Charges:

The Company has completed its previously announced negotiations with the Drogheda, Ireland employee representatives regarding separation benefits related to the closure of the Company’s compounding facility at that location. Based upon the period-end estimates regarding the separation agreements, the Company increased its provision for severance costs by approximately $4 million in the first quarter of 2010. The balance of the restructuring charges in the first six months of 2010 was mainly due to accelerated depreciation and other restructuring related costs pertaining to the rationalization of our Fragrance and Ingredients operations in Europe.

We expect to incur total costs related to this restructuring plan of approximately $31-$34 million, consisting primarily of $18 million of employee termination costs, $9-$12 million in plant shutdown and business transition costs and $4 million in accelerated depreciation of related fixed assets. The increase from our prior estimate reflects projected higher inventory write-offs and transition costs associated with a more complex operating environment, due to higher activity levels, and potential incremental pension settlement costs.

Since the third quarter of 2009, we have recorded total expenses of $24.0 million relating to this plan, of which $21.1 million was recorded to restructuring and other charges and $2.9 million recorded to costs of sales and research, selling and administrative expenses.

The balance of the employee-related liabilities is expected to be utilized by the end of 2011 as obligations are satisfied. Change in restructuring liabilities during the six months ended June 30, 2010 is as follows:

						Asset-
		Employee-				Related
		Related				and Other				Total
Balance December 31, 2009		$	18,914			$	—			$	18,914
Additional charges			3,894				2,937				6,831
Payments and other costs			(3,493	)			—				(3,493	)
Non-cash charges			—				(2,937	)			(2,937	)
Balance June 30, 2010		$	19,315			$	—			$	19,315

Note 5. Goodwill and Other Intangible Assets, Net:

Goodwill by operating segment for both June 30, 2010 and December 31, 2009 is as follows:

(DOLLARS IN THOUSANDS)		Amount
Flavors		$	319,479
Fragrances			346,103
Total		$	665,582

Trademark and other intangible assets consist of the following amounts:

		June 30,				December 31,
(DOLLARS IN THOUSANDS)		2010				2009
Gross carrying value		$	165,406			$	165,406
Accumulated amortization			(113,536	)			(110,458	)
Total		$	51,870			$	54,948

Amortization expense for the three months ended June 30, 2010 and June 30, 2009 was $1.5 million. Amortization expense for the six months ended June 30, 2010 and June 30, 2009 was $3.1 million. Estimated annual amortization is $6 million for years 2010 through 2013 and $5 million for 2014.

Note 6. Comprehensive Income:

Changes in the Accumulated other comprehensive income loss (“AOCI”) component of shareholders’ equity were as follows:

						Accumulated (losses)				Pension and
						gains on derivatives				postretirement net
		Translation				qualifying as hedges,				liability adjustment,
(DOLLARS IN THOUSANDS)		adjustments				net of tax				net of tax				Total
Balance December 31, 2009		$	(68,606	)		$	(2,741	)		$	(199,627	)		$	(270,974	)
Change			(35,896	)			(187	)			3,451				(32,632	)
Balance June 30, 2010		$	(104,502	)		$	(2,928	)		$	(196,176	)		$	(303,606	)

						Accumulated (losses)				Pension and
						gains on derivatives				postretirement net
		Translation				qualifying as hedges,				liability adjustment,
(DOLLARS IN THOUSANDS)		adjustments				net of tax				net of tax				Total
Balance December 31, 2008		$	(149,846	)		$	(3,832	)		$	(171,427	)		$	(325,105	)
Change			67,434				1,196				2,275				70,905
Balance June 30, 2009		$	(82,412	)		$	(2,636	)		$	(169,152	)		$	(254,200	)

Note 7. Borrowings:

Debt consists of the following:

(DOLLARS IN THOUSANDS)		Rate				Maturities				June 30, 2010				December 31, 2009
Bank borrowings and overdrafts										$	48,739			$	76,780
Total current debt											48,739				76,780
Senior notes - 2007			6.38	%			2017-27				500,000				500,000
Senior notes - 2006			6.06	%			2011-16				325,000				325,000
Bank borrowings			0.41	%			2012				75,143				75,166
Japanese Yen notes			2.81	%			2011				20,525				19,614
Other											7				16
Deferred realized gains on interest rate swaps											13,925				14,953
Total long-term debt											934,600				934,749
Total debt										$	983,339			$	1,011,529

The estimated fair value at June 30, 2010 of our Senior Notes — 2007 and Senior Notes — 2006 was approximately $591 million and $360 million, respectively. The fair value of our Senior Notes was calculated using discounted cash flows applying current interest rates and current credit spreads based on our own credit risk. The estimated fair value of the remainder of our long-term debt at June 30, 2010 approximated the carrying value.

Note 8. Income Taxes:

As of June 30, 2010, we had $67 million of gross unrecognized tax benefits recorded in Other liabilities, that if recognized, would be recorded as a component of income tax expense and would affect our effective tax rate.

We have consistently recognized interest and penalties related to unrecognized tax benefits as a component of income tax expense. At June 30, 2010, we had accrued $11 million of interest and penalties.

We have several tax audits in process and have open tax years with various significant taxing jurisdictions that range primarily from 2002 to 2009. Based on currently available information, we do not believe the ultimate outcome of these tax audits and other tax positions related to open tax years, when finalized, will have a material adverse effect on our financial position, results of operations or cash flows. We review uncertain tax positions on an ongoing basis and related reserves are adjusted in light of changing facts and circumstances including the progress of tax audits.

The Company has historically utilized bank guarantees to collateralize tax exposures related to certain administrative proceedings. With the current turmoil in the credit markets, the Company may be precluded from securing similar forms of collateral for unrecognized tax benefits. If this situation occurs, the Company may be required to self-fund any future collateral obligations.

The effective tax rate for the three and six months ended June 30, 2010 was 28.3% compared with 29.2% and 27.3% for the comparable periods in 2009. The reduction in the effective tax rate in three months ended June 30, 2010 was mainly attributable to mix of earnings across the countries in which the company operates and lower relative repatriation costs. A lower effective tax rate on the restructuring charges also impacted the 2010 rate as compared to the three and six months ended June 30, 2009.

Note 9. Equity Compensation Plans:

We have various plans under which our officers, senior management, other key employees and directors may be granted equity-based awards, including PRS, restricted stock units (“RSUs”), SSARs or stock options to purchase our common stock.

We offer a Long-Term Incentive Plan (“LTIP”) for senior management. LTIP plan awards are based on meeting certain targeted financial and/or strategic goals established by the Compensation Committee of the Board of Directors early in each three-year LTIP cycle. Beginning with the LTIP 2007-2009 cycle and each three-year cycle thereafter, the targeted payout is 50% cash and 50% IFF stock. The number of shares for the 50% stock portion is determined by the closing share price on the first trading day at the beginning of the cycle. Generally, the executive must remain employed with IFF during the cycle to receive the payment.

Principal assumptions used in applying the Binomial model for SSAR’s granted during the six months ended June 30, 2010 and June 30, 2009 were as follows:

		2010				2009
Weighted average fair value of SSAR’s granted during the period		$	10.41			$	6.99
Assumptions:
Risk-free interest rate			2.2	%			2.5	%
Expected volatility			29.8	%			31.2	%
Expected dividend yield			2.2	%			3.3	%
Expected life, in years			5				5
Termination rate			1.09	%			0.91	%
Exercise multiple			1.38				1.46

Stock option and SSAR activity for the six months ended June 30, 2010 was as follows:

						Weighted Average
(SHARE AMOUNTS IN THOUSANDS)		Options/SSARs				Exercise Price
Balance at December 31, 2009			2,228			$	35.27
Exercised			(391	)		$	34.04
Cancelled			(6	)		$	43.13
Balance at March 31, 2010			1,831			$	35.50
Granted			197			$	44.92
Exercised			(173	)		$	32.27
Cancelled			(38	)		$	35.47
Balance at June 30, 2010			1,817			$	36.82

RSU and PRS activity for the six months ended June 30, 2010 was as follows:

						Weighted Average
						Grant Date Fair
(SHARE AMOUNTS IN THOUSANDS)		RSU				Value Per Share
Balance at December 31, 2009			978			$	37.42
Cancelled			(2	)		$	41.16
Balance at March 31, 2010			976			$	38.52
Granted			281			$	45.95
Vested			(193	)		$	40.30
Cancelled			(12	)		$	38.15
Balance at June 30, 2010			1,052			$	37.29

						Weighted Average
						Grant Date Fair
(SHARE AMOUNTS IN THOUSANDS)		PRS				Value Per Share
Balance at December 31, 2009			498			$	20.28
Granted			39			$	22.90
Cancelled			(4	)		$	15.24
Balance at March 31, 2010			533			$	20.52
Granted			174			$	22.46
Vested			(180	)		$	25.89
Balance at June 30, 2010			527			$	19.31

Pre-tax expense related to all forms of equity compensation was as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
(DOLLARS IN THOUSANDS)		2010				2009				2010				2009
Restricted stock and RSUs		$	4,990			$	4,736			$	10,109			$	8,824
Stock options and SSARs			329				641				671				1,312
Total equity compensation expense		$	5,319			$	5,377			$	10,780			$	10,136

Tax benefits associated with share-based compensation of $2.0 million and $4.0 million were recognized for the second quarter and first six months 2010, respectively, $1.7 million and $3.2 million for the second quarter and first six months 2009, respectively.

Note 10. Segment Information:

We are organized into two business segments, Flavors and Fragrances; these segments align with the internal structure used to manage these businesses. Accounting policies used for segment reporting are described in Note 1 of the Notes to the Consolidated Financial Statements included in our 2009 Form 10-K. We evaluate the performance of these segments, which we refer to as business units, based on operating profit before interest expense, other income (expense), net and income taxes.

The Global expenses caption represents corporate and headquarters-related expenses which include legal, finance, human resources, certain incentive compensation expenses and other administrative expenses that are not allocated to individual business units.

Our reportable segment information was as follows:

		Three Months Ended June 30, 2010
										Global
(DOLLARS IN THOUSANDS)		Flavors				Fragrances				Expenses				Consolidated
Net sales		$	304,323			$	361,477			$	—			$	665,800
Operating profit		$	64,507			$	65,374			$	(22,090	)		$	107,791
Interest expense															(12,051	)
Other income (expense), net															(2,107	)
Income before taxes on income														$	93,633

		Three Months Ended June 30, 2009
										Global
(DOLLARS IN THOUSANDS)		Flavors				Fragrances				Expenses				Consolidated
Net sales		$	269,768			$	298,493				—			$	568,261
Operating profit		$	54,594			$	37,743			$	(8,807	)		$	83,530
Interest expense															(14,047	)
Other income (expense), net															(1,569	)
Income before taxes on income														$	67,914

		Six Months Ended June 30, 2010
										Global
(DOLLARS IN THOUSANDS)		Flavors				Fragrances				Expenses				Consolidated
Net sales		$	604,492			$	715,218			$	—			$	1,319,710
Operating profit		$	126,084			$	121,389			$	(35,102	)		$	212,371
Interest expense															(24,787	)
Other income (expense), net															(4,871	)
Income before taxes on income														$	182,713

		Six Months Ended June 30, 2009
										Global
(DOLLARS IN THOUSANDS)		Flavors				Fragrances				Expenses				Consolidated
Net sales		$	535,889			$	592,002			$	—			$	1,127,891
Operating profit		$	107,434			$	74,535			$	(16,590	)		$	165,379
Interest expense															(33,828	)
Other income (expense), net															(406	)
Income before taxes on income														$	131,145

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 June 30, 2010 and 2009 were $158.1 million and $139.1 million, respectively and for the six months ended June 30, 2010 and 2009 were $309.0 million and $280.3 million, respectively. Net sales attributed to all foreign countries in total for the three months ended June 30, 2010 and 2009 were $507.7 million and $429.2 million, respectively and for the six months ended June 30, 2010 and 2009 were $1,010.7 million and $847.6 million, respectively. No non-U.S. country had net sales in any period presented greater than 7% of total consolidated net sales.

Note 11. Retirement Benefits:

Pension expense included the following components:

U.S. Plans		Three Months Ended June 30,								Six Months Ended June 30,
(DOLLARS IN THOUSANDS)		2010				2009				2010				2009
Service cost for benefits earned		$	910			$	1,180			$	1,820			$	2,360
Interest cost on projected benefit obligation			5,990				5,985				11,979				11,970
Expected return on plan assets			(6,042	)			(6,042	)			(12,084	)			(12,084	)
Net amortization and deferrals			1,812				1,584				3,624				3,168
Defined benefit plans			2,670				2,707				5,339				5,414
Defined contribution and other retirement plans			1,825				1,784				3,737				3,783
Total pension expense		$	4,495			$	4,491			$	9,076			$	9,197

Non-U.S. Plans		Three Months Ended June 30,								Six Months Ended June 30,
(DOLLARS IN THOUSANDS)		2010				2009				2010				2009
Service cost for benefits earned		$	2,637			$	2,040			$	5,194			$	4,023
Interest cost on projected benefit obligation			8,601				7,136				17,012				14,272
Expected return on plan assets			(10,838	)			(9,350	)			(21,439	)			(18,701	)
Net amortization and deferrals			1,345				698				2,690				1,395
(Gain)/loss due to settlements and curtailments			30				—				63				—
Defined benefit plans			1,775				524				3,520				989
Defined contribution and other retirement plans			1,226				1,022				2,197				2,053
Total pension expense		$	3,001			$	1,546			$	5,717			$	3,042

During 2010, we may contribute an estimated $12 million to our U.S. pension plans and up to $16 million to our non-U.S. pension plans. In the three and six months ended June 30, 2010, no contributions were made to our qualified U.S. pension plan. In the three and six months ended June 30, 2010, $3.5 million and $7.8 million of contributions were made to the non-U.S. plans, respectively. In the three and six months ended June 30, 2010, no benefit payments were made with respect to our non-qualified U.S. pension plan.

The financial returns of our investment trusts during the first half of 2010 continue to be generally in line with the markets by asset class. We had little exposure to financial institution equities and had no direct investments in sub-prime related assets.

Expense recognized for postretirement benefits other than pensions included the following components:

		Three Months Ended June 30,								Six Months Ended June 30,
(DOLLARS IN THOUSANDS)		2010				2009				2010				2009
Service cost for benefits earned		$	410			$	441			$	820			$	882
Interest on benefit obligation			1,643				1,556				3,286				3,112
Net amortization and deferrals			(489	)			(565	)			(978	)			(1,130	)
Total postretirement benefit expense		$	1,564			$	1,432			$	3,128			$	2,864

We expect to contribute $6 million to our postretirement benefit other than pension plans in 2010. In the three and six months ended June 30, 2010, $1.3 million and $2.6 million of contributions were made, respectively.

Note 12. 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.

When available, we generally use quoted market prices to determine fair value, and classify such items in Level 1. We determine the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) using the LIBOR (London InterBank Offer Rate) 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. The fair value of these liabilities, net was approximately $4.6 million at June 30, 2010. We do not have any instruments classified as Level 3.

The market valuation adjustments include a bilateral or “own” credit risk adjustment applied to reflect our own credit risk when valuing all liabilities measured at fair value, in accordance with the requirements under the accounting guidance. The methodology is consistent with that applied in generating counterparty credit risk adjustments, but incorporates our own credit risk as observed in the credit default swap market. As for counterparty credit risk, our own credit risk adjustments include the impact of credit risk mitigants. The estimated change in the fair value of these liabilities due to such changes in our own credit risk (or instrument-specific credit risk) was immaterial as of June 30, 2010.

Derivatives

We periodically enter 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.

In 2003, we executed a 10-year Yen — U.S. dollar currency swap related to the monthly sale and purchase of products between the U.S. and Japan which has been designated as a cash flow hedge.

In 2005, we entered into an interest rate swap agreement effectively converting the fixed rate on our long-term Japanese Yen borrowings to a variable short-term rate based on the Tokyo InterBank Offering Rate (TIBOR) plus an interest markup. This swap was designated as a fair value hedge. Any amounts recognized in interest expense for both periods presented have been insignificant.

In February 2009, we paid $16 million to close out the $300 million U.S. Dollar (“USD”) LIBOR to European InterBank Offer Rate (EURIBOR) interest rate swap. As this swap was designated as a net investment hedge, $12 million of the loss was deferred in AOCI where it will remain until the Euro net investment is divested and $4 million was included as a component of interest expense during the six months ended June 30, 2009.

In May 2009 we entered into a forward currency contract which qualified as a net investment hedge, in order to protect a portion of our net European investment from foreign currency risk. We recognized a $1.6 million loss during the year ended December 31, 2009, which was deferred as a component of AOCI. The ineffective portion of this net investment hedge was not material. This forward currency contract matured before the end of the second quarter of 2009. Upon its maturity, we entered into an intercompany loan payable in the amount of 40 million Euros in order to protect a portion of our net European investment from foreign currency risk. This intercompany loan was designated as a net investment hedge and experienced no ineffectiveness while outstanding. We recognized a $3.1 million loss during the year ended December 31, 2009, which was deferred as a component of AOCI.

In March 2010, we entered into three forward currency contracts which qualified as net investment hedges, in order to protect a portion of our net European investments from foreign currency risk. Two of these three forward currency contracts matured; one during the three months ended June 30, 2010 and the other during the three months ended March 31, 2010.

During the second quarter of 2010, we entered into four forward currency contracts which qualified as net investment hedges, in order to mitigate a portion of our net European investments from foreign currency risk.

During the second quarter of 2010, we entered into several forward currency contracts which qualified as cash flow hedges. The objective of these hedges is to protect the currency risk associated with forecasted US Dollar (USD) denominated raw material purchases made by Euro (EUR) functional entities which result from changes in the EUR/USD exchange rate.

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 June 30, 2010 and December 31, 2009 (in millions):

		June 30, 2010
		Fair Value of				Fair Value of
		Derivatives				Derivatives Not
		Designated as				Designated as
		Hedging				Hedging				Total Fair
		Instruments				Instruments				Value
Derivative assets (a)
Foreign currency contracts		$	4.2			$	5.1			$	9.3
Interest rate swap		$	0.1			$	—			$	0.1
		$	4.3			$	5.1			$	9.4
Derivative liabilities (b)
Foreign currency contracts		$	4.8			$	1.6			$	6.4

		December 31, 2009
		Fair Value of				Fair Value of
		Derivatives				Derivatives Not
		Designated as				Designated as
		Hedging				Hedging				Total Fair
		Instruments				Instruments				Value
Derivative assets (a)
Foreign currency contracts		$	—			$	0.2			$	0.2
Interest rate swap		$	0.2			$	—			$	0.2
		$	0.2			$	0.2			$	0.4
Derivative liabilities (b)
Foreign currency contracts		$	4.5			$	0.9			$	5.4

The following table shows the effect of the Company’s derivative instruments which were not designated as hedging instruments in the Consolidated Statements of Income for the three and six months ended June 30, 2010 and June 30, 2009 (in millions):

Amount of Gain or (Loss)

Recognized in Income on

Location of Gain

Derivative

or (Loss)

Derivatives Not Designated as

For the three months

Recognized in

Hedging Instruments under

ended June 30,

Income on

ASC 815

2010

2009

Derivative

Foreign currency contract

$

16.3

$

4.1

Other (income) expense, net

Amount of Gain or (Loss)

Recognized in Income on

Location of Gain

Derivative

or (Loss)

Derivatives Not Designated as

For the six months ended

Recognized in

Hedging Instruments under

June 30,

Income on

ASC 815

2010

2009

Derivative

Foreign currency contract

$

14.4

$

7.1

Other (income) expense, net

Most of these net gains offset any recognized 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 Income for the three and six months ended June 30, 2010 and June 30, 2009 (in millions):

														Amount of Gain or
		Amount of Gain or												(Loss) Reclassified
		(Loss) Recognized in												from Accumulated
		OCI on Derivative								Location of Gain or				OCI into Income
		(Effective Portion)								(Loss) Reclassified				(Effective Portion)
		For the three months								from Accumulated				For the three months
		ended June 30,								OCI into Income				ended June 30,
		2010				2009				(Effective Portion)				2010				2009
Derivatives in Cash Flow Hedging Relationships (*):
Cross currency swap (1)		$	(0.5	)		$	(0.4	)		Other (income) expense, net				$	(0.3	)		$	(0.1	)
Forward currency contract		$	1.0			$	—			Other (income) expense, net				$	—			$	—
Derivatives in Net Investment Hedging Relationships (*):
Forward currency contract		$	4.2			$	—				N/A			$	—			$	—
Total		$	4.7			$	(0.4	)						$	(0.3	)		$	(0.1	)

														Amount of Gain or
		Amount of Gain or												(Loss) Reclassified
		(Loss) Recognized in												from Accumulated
		OCI on Derivative								Location of Gain or				OCI into Income
		(Effective Portion)								(Loss) Reclassified				(Effective Portion)
		For the six months								from Accumulated				For the six months
		ended June 30,								OCI into Income				ended June 30,
		2010				2009				(Effective Portion)				2010				2009
Derivatives in Cash Flow Hedging Relationships (*):
Cross currency swap (1)		$	(0.2	)		$	1.2			Other (income) expense, net				$	(0.6	)		$	(0.3	)
Forward currency contract		$	1.0			$	—			Other (income) expense, net				$	—			$	—
Derivatives in Net Investment Hedging Relationships (*):
Forward currency contract		$	4.8			$	—				N/A			$	—			$	—
Total		$	5.6			$	1.2							$	(0.6	)		$	(0.3	)

Note 13. Commitments and Contingencies:

The Company accrues for contingencies related to litigation in accordance with ASC 450-20, “Loss Contingencies”, which requires the Company to assess contingencies to determine the degree of probability and range of possible loss. An estimated 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. The Company regularly reviews contingencies 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 the amounts it has accrued on any matter. It is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

Popcorn Flavor Litigation

We are party to a number of lawsuits and claims related primarily to flavoring supplied by us and by other third party suppliers, in most instances to manufacturers of butter flavored popcorn. A total of fourteen actions involving 228 claimants are currently pending against us and other flavor suppliers and related companies based on similar claims of alleged respiratory illness. In certain cases, plaintiffs are unable to demonstrate that they have suffered a compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to our flavor products. In most of the complaints, the damages sought by the plaintiffs are not alleged at the pleading stage and may not be specified until a much later time in the proceeding, if at all. During the six months ended June 30, 2010, there have been two new actions filed involving ten claimants and two actions involving four claimants have been settled for a net out-of-pocket amount which is not material to us including insurance recovery, and three other cases have been consolidated with other pending cases. In addition, 55 claimants were voluntarily dismissed from continuing cases based on a determination that their claims lacked merit.

At each balance sheet date, or more frequently as conditions warrant, we review the status of each pending claim, as well as our insurance coverage for such claims with due consideration given to potentially applicable deductibles, retentions and reservation of rights under insurance policies with respect to all these matters. The liabilities are recorded at management’s best estimate of the 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. Amounts accrued are also based upon our historical experience with these claims, including claims which have been closed with no liability as well as claims settled to date. Settled claims, since the inception of the flavor-related claims, have not been material to us in any reporting period after giving effect to insurance recovery. 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 are not able to provide an amount or range of estimated loss in excess of the liability currently accrued at the balance sheet date as to asserted and unasserted claims because such estimate cannot reasonably be made.

While the ultimate outcome of any litigation cannot be predicted, management believes that adequate provision has been made with respect to all known claims. Based on information presently available and in light of the merits of our defenses and the availability of insurance, we do not expect the outcome of the above cases, singly or in the aggregate, to have a material adverse effect on our financial condition, results of operations or liquidity. There can be no assurance that future events will not require us to increase the amount we have accrued for any matter or accrue for a matter that has not been previously accrued.

We periodically assess our insurance coverage for all known claims, taking into account aggregate coverages by occurrence, limits of coverage, self-insured retentions and deductibles, historical claims experience and claims experience with insurers.

We record the expected liability with respect to these claims in Other liabilities and expected recoveries from our insurance carrier group in Other assets. We believe that realization of the insurance receivable is probable due to the terms of the insurance policies and the payment experience to date of the carrier group as it relates to these claims.

Patent Claims

A complaint, captioned V. Mane Fils S.A. v. International Flavors and Fragrances, Inc. was filed in U.S. District Court in the District of New Jersey in May 2006, and alleges that the Company has and continues to infringe U.S. Patent Nos. 5,725,856 and 5,843,466, relating to a flavor ingredient that may provide a cooling effect. The Company answered the complaint by denying liability, asserting that both patents are invalid and various other defenses. In June 2008, plaintiff amended its complaint to add claims for violations of the Lanham Act, tortuous interference and unfair competition. The Company answered the amended complaint by denying all liability. In connection with the patent claims, the plaintiff seeks monetary damages, damages for alleged willful infringement, injunctive relief and fees, costs and interest. In connection with the additional claims, plaintiff also seeks monetary damages, punitive damages and fees and costs. In May 2010, following reexamination of the patents in question by the U.S. Patent Office, all of the patent claims, initially rejected in the reexamination proceeding, were reallowed. The Company and the plaintiff have each filed motions for summary judgment with respect to various claims. No trial date has been scheduled. The Company denies the allegations and will defend its position in Court.

We analyze our liability on a regular basis and accrue for litigation loss contingencies when they are probable and estimable. During the second quarter 2010, we recorded a provision related to this case which is reflected in Other Liabilities. The Company is unable to reasonably estimate the amount or realistic range of potential loss above its recorded liability, if any, that might result if the outcome of this matter is unfavorable. Based on present information, the Company believes that its ultimate liability, if any, arising from this proceeding would not have a material adverse effect on its financial position or liquidity; however, due to the unpredictability regarding the litigation process, such claims, if ultimately resolved against us, could potentially have a material adverse effect on our cash flows or results of operations in a particular period. An adverse outcome could also potentially affect our ability to sell one or more flavor products to the extent the Court ultimately issued an injunction related to the patents. The Company disputes the allegations of wrongdoing, believes it has meritorious defenses and is vigorously defending all claims.

Environmental

Over the past approximately 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 ten facilities operated by third parties at which investigation and/or remediation activities may be ongoing. We analyze our liability on a regular basis and accrue for environmental liabilities when they are probable and estimable. At June 30, 2010, we estimated our share of the total future costs for these sites to be less than $5 million.

While joint and several liability is authorized under federal and state environmental laws, we believe that the amounts we have paid and anticipate paying in the future for clean-up costs and damages at all sites are not and will not be material to our financial condition, results of operations or liquidity. This conclusion is based upon, among other things, the involvement of other PRP’s at most sites, the status of the proceedings, including various settlement agreements and consent decrees, the extended time period over which payment will likely be made and an agreement reached in July 1994 with three of our liability insurers pursuant to which defense costs and indemnity amounts payable by us in respect of the sites will be shared by the insurers up to an agreed amount.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading creator and manufacturer of flavor and fragrance compounds used to impart or improve the flavor or fragrance in a wide variety of consumer products. The precise size of the global market for flavors and fragrances is difficult to determine because the industry is highly fragmented, both geographically and along product lines; there are a limited number of publicly traded companies in the industry; certain customers maintain in-house capabilities fulfilling a portion of their flavor or fragrance needs; and the quality and depth of market information in developing regions of the world is limited.

IFF is organized into two business units that reflect our Flavor and Fragrance businesses. Flavor compounds are sold to the food and beverage industries for use in consumer products such as prepared foods, beverages, dairy, food and confectionery products. The fragrance business unit consists of three fragrance categories: functional fragrances, including fragrance compounds for personal care (e.g., soaps) and household products (e.g., detergents, softeners, cleaning agents, candles and air fresheners); fine fragrance and beauty care, including perfumes, colognes and toiletries; and ingredients, consisting of natural and synthetic ingredients that can be combined with other materials to create unique functional and fine fragrance compounds. Major fragrance customers include the cosmetics industry, including perfume and toiletries manufacturers, and the household products industry, including manufacturers of soaps, detergents, fabric care, household cleaners and air fresheners. Approximately 55% of our ingredient production is consumed internally; the balance is sold to third party customers.

The under-pinning of structural growth for the flavor and fragrance industry is population growth, an expanding middle class and technology. Changing social habits resulting from factors such as increases in personal income, leisure time, health and wellness and urbanization stimulate demand for consumer products utilizing flavors and fragrances. These developments also drive the creation and development of new molecules, technologies and/or solutions that facilitate and improve the end-use consumption of flavors and fragrances in consumer products.

Flavors and fragrances are generally:

•

created for the exclusive use by a specific customer;

•

sold in powder or liquid form, in amounts ranging from a few pounds to several tons depending on the nature of the end product in which they are used;

•

a small percentage of the volume and cost of the end product sold to the consumer; and

•

a major factor in directing consumer preference for consumer packaged goods.

The flavors and fragrances industry is impacted by macroeconomic factors in all product categories and geographic regions. Such factors include the impact of currency on the price of raw materials and operating costs, as well as on translation of reported results.

In addition, IFF is susceptible to margin pressures due to customers’ cost improvement programs and input cost increases. However, these pressures can often be mitigated through a combination of product reformulation, sourcing strategies and material substitution plus internal cost containment efforts, and the development of innovative and streamlined solutions and processes.

STRATEGIC DRIVERS

To increase shareholder value, we pursue and develop a value-creation model that encompasses three main elements: investing in research & development to identify and commercialize new, innovative materials and delivery systems; maintaining a deep understanding of both consumer preferences and consumer product brands; and excellence in our creative capabilities. Our goal is to deliver differentiated solutions that enable our customers’ brands to win in the marketplace.

In order to pursue these strategies, our organization is focused on ensuring that we efficiently create, produce, and sell unique, superior, and economically competitive products through our world class integration of research and development, consumer insight, creativity, via excellence in execution. We believe we are well positioned to achieve success by targeting strategically important global and regional customers in both developed and emerging markets; attracting, developing and retaining top talent; investing in research and development; and fostering a culture of innovation, accountability and continuous improvement.

Operations

Comparison of Second Quarters of 2010 and 2009

Sales Commentary

Second quarter 2010 sales totaled $666 million, an increase of 17% from the prior year quarter. The significant growth (+17% in local currency (LC) terms) reflects higher volume in both businesses and continued strong success in driving new business, which accounted for approximately 40% of the LC sales growth. The higher volumes were driven by a recovery in demand, lower base period comparisons in the second quarter 2009, primarily in Fine Fragrances and Ingredients, and some element of re-stocking across both businesses.

On a reported basis, Flavors’ sales increased 13%; excluding the impact of foreign currency translation, sales for the Flavors business increased 11% from the prior year period. Two thirds of the improvement was driven by higher volume (including elements of re-stocking) with the balance due to net new wins. Solid LC growth was experienced across all product categories, led by Beverages. Double digit growth was seen in Europe, Africa and Middle East (EAME) and Greater Asia as a result of higher volumes and new business particularly in the Beverage, Savory, and Confectionery categories. Growth in both regions benefited from investments made last year to strengthen our commercial and development capabilities. Sales in North America were up 7% driven by higher volume in Confectionery and Beverages, partially offset by weakness in Dairy sales. Latin America had solid growth, up 4% in LC as volume recovery in Confectionery and Savory and new net wins more than offset the effects of non-strategic business lost in the second half of 2009.

Fragrance sales increased significantly, up 21% on a reported basis and 23% in LC terms. Approximately 60% of the improvement is due to increased volume, primarily in Fine Fragrance and Ingredients, with the balance attributable to new business. Volume gains are attributable to a bounce back in demand, mainly in Fine Fragrance and Ingredients, lower base period comparisons, and some elements of re-stocking. Overall, Fine and Beauty Care LC sales increased 37% versus last year, driven by new business that was supported by increased customer promotional activities, a recovery in demand, and low prior year sales levels. LC Functional Fragrance sales increased 12%, driven by continued strong fabric care performance. All regions delivered double-digit LC sales gains, led by EAME (Fine Fragrance and Ingredients) and Greater Asia (Functional Fragrance and Beauty Care).

Sales performance by region and product category in comparison to the prior year quarter in both reported dollars and local currency, where applicable, was as follows:

				% Change in Sales-Second Quarter 2010 vs Second Quarter 2009
				Fine &
				Beauty Care				Functional				Ingredients				Total Frag.				Flavors				Total
North America		Reported			24	%			10	%			25	%			19	%			7	%			13	%
EAME		Reported			47	%			5	%			22	%			23	%			14	%			20	%
		Local Currency			55	%			10	%			29	%			29	%			18	%			25	%
Latin America		Reported			34	%			7	%			26	%			19	%			8	%			15	%
		Local Currency			31	%			7	%			27	%			18	%			4	%			13	%
Greater Asia		Reported			26	%			24	%			8	%			21	%			18	%			19	%
		Local Currency			23	%			22	%			7	%			19	%			12	%			15	%
Total		Reported			36	%			11	%			21	%			21	%			13	%			17	%
		Local Currency			37	%			12	%			24	%			23	%			11	%			17	%