Source: http://ir.iff.com/node/25941/html
Timestamp: 2020-03-29 15:20:48
Document Index: 761938530

Matched Legal Cases: ['in Fine', 'in Fine', 'in Fine', 'in Fine', 'in Fine', 'in Fine', 'in Fine', 'in Fine']

For the purpose of reporting the following market value of registrant’s outstanding common stock, the term “affiliate” refers to persons, entities or groups which directly or indirectly control, are controlled by, or are under common control with the registrant and does not include individual executive officers, directors or less than 10% shareholders. The aggregate market value of registrant’s common stock not held by affiliates as of June 30, 2015 was $8,921,565,803.
As of February 15, 2016, there were 79,867,884 shares of the registrant’s common stock, par value 12 1/2¢ per share, outstanding.
Portions of the registrant’s proxy statement for the 2016 Annual Meeting of Shareholders (the “IFF 2016 Proxy Statement”) are incorporated by reference in Part III of this Form 10-K.
We are a leading global creator of flavors and fragrances (including cosmetic active ingredients) that are used in the food, beverage, personal care or household products industries. Our flavor and fragrance compounds combine a number of ingredients to produce proprietary formulas created by our flavorists and perfumers. Utilizing our capabilities in consumer insight, research and product development (“R&D”) and creative expertise, we partner with our customers to provide innovative and differentiated product offerings that drive consumer preference. We believe that this collaborative approach will generate market share gains for our customers.
Our approximately 6,700 employees, 34 manufacturing facilities and 33 creative centers are located in 35 different countries. We collaborate with our customers to develop the 38,000 products we provide our customers in approximately 150 countries. We believe we are well positioned to serve both our global customers as well as the increasing number of regional and specialty consumer goods producers. In addition, through our acquisition of Lucas Meyer Cosmetics (“Lucas Meyer”) in 2015, we have added to our portfolio active and functional ingredients, botanicals and delivery systems to support our customers’ cosmetic and personal care product lines.
We principally compete in the flavors and fragrances market, which 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 multinational companies and smaller regional and local participants that supply products such as seasonings, texturizers, spices, enzymes, certain food-related commodities, fortified products and cosmetic 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. The flavors and fragrances markets in which we compete were estimated by management to be $18.0 billion in 2014, and are forecasted to grow to approximately $21.6 billion by 2019, primarily driven by expected growth in emerging markets.
Source: Company estimates based on IAL Consultants: Overview of the Global Flavours & Fragrances market (9th edition, 2014).
In 2015, we achieved sales of approximately $3.0 billion, making us one of the top four companies in the global flavors and fragrances sub-segment of the broader ingredients and compounds market. Within the flavors and fragrances sub-segment of this broader market, the top four companies represent approximately two-thirds of the total estimated sales. In late 2015, we expanded our capabilities and product offerings into cosmetic actives through our acquisition of Lucas Meyer. We estimate the market size for cosmetic active ingredients to be approximately $1.5 billion as of 2015. We believe that our diversified business platform consisting of expansive geographic coverage, a broad product portfolio and a global and regional customer base, positions us to achieve long-term growth as the flavors and fragrances markets expand.
We operate in two business segments, Flavors and Fragrances. In 2015, our Flavors business represented 48% of our sales, while our Fragrances business represented 52% of sales. Our business is geographically diverse, with sales to customers in the four regions set forth below:
We are committed to winning in emerging markets. We believe that significant future growth potential for the flavors and fragrances industry, and for our business, exists in the emerging markets (all markets except North America, Japan, Australia, and Western, Southern and Northern Europe). Over the past five years our currency neutral growth rate in emerging markets have outpaced that of developed markets. Despite current challenges experienced during 2015 in certain emerging markets, such as Brazil, Argentina and China, we expect this long-term trend to continue for the foreseeable future.
We have had operations in some of the largest emerging markets for multiple decades. As a result of these established operations, sales in emerging markets represented 51% of 2015 sales, up from 50% in 2014. As our customers in emerging markets grow their businesses, they will have the ability to leverage our long-standing presence and our extensive market knowledge to help drive their brands. During 2015, our 25 largest customers accounted for 52% of our sales. Sales to our largest customer accounted for 12% of our sales for each of the last three fiscal years. These sales were principally in our Fragrances business.
During 2015, we announced our Vision 2020 strategy, which focuses on building differentiation and accelerating growth. Our Vision 2020 strategy has four pillars:
Innovating Firsts - We seek to strengthen our position and drive differentiation in priority R&D platforms. We are sharply focused on key initiatives that are grounded in consumer needs, such as modulation, proteins and textures for flavors, new molecules and digital scents for fragrances, and delivery systems and naturals across both business units. In 2015, we launched four captive molecules to be used exclusively by our perfumers, and commercialized two new natural taste modulators.
Win Where We Compete - Our goal is to achieve a #1 or #2 market leadership position in key markets and categories and with specific customers. For example, we believe that there is opportunity to further improve our market share position in North America, where innovation-centric customers are expected to continue to drive one of the world’s largest flavor and fragrance markets. In the Middle East and Africa, which are among the fastest-growing regions globally, many of our international and domestic customers are strategizing to penetrate these key markets and we believe that we can leverage our existing relationships with them to increase our participation in these markets. In addition, we are targeting specific end-use categories, such as Home Care and Fine Fragrances, and customers, where innovation and creativity will fuel growth.
Become Our Customers' Partner of Choice - Our goal is to attain commercial excellence by providing our customers with in-depth local consumer understanding, industry-leading innovation, outstanding service and the highest quality products. In 2015, we won the North America innovation award with one of our largest flavor customers, which recognizes partners for their thought leadership. In addition, one of our global fragrance customers presented us with their Supplier Excellence award, an achievement designed to acknowledge their top performing business partners. We believe the addition of Lucas Meyer to our Fragrances business enhances our capabilities and product offerings needed to be a partner of choice. We believe that becoming our customers’ partner of choice will lead to incremental business opportunities for our customers and us.
Strengthen and Expand the Portfolio - We actively pursue value-creation through partnerships, collaborations, and acquisitions within flavors, fragrances and adjacencies. We prioritize opportunities that provide (i) access to new technologies, (ii) the ability to increase our market share in key markets and with key customers or (iii) access to
adjacent products or services that will position us to leverage our expertise in science and technology and our customer base. As part of this pillar, we are targeting $500 million to $1 billion of incremental sales growth through acquisitions by 2020.
During 2015, we completed two acquisitions that are aligned with our Vision 2020 strategy. Through our acquisition of Ottens Flavors in May 2015, we strengthened our flavors market position in North America and increased our capabilities to serve small and mid-sized customers. We believe our acquisition of Lucas Meyer will expand our ingredients offerings into the cosmetic industry and thereby allow us to build greater customer intimacy and drive penetration into the skin care and hair care businesses.
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 of the end products in which they are used. As a leading creator of flavor compounds, 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. We create our flavors in our regional creative centers that allow us to satisfy local taste preferences, while also helping to ensure regulatory compliance and production standards. We develop thousands of different flavors and taste offerings for our customers, most of which are tailor-made. We continually develop new formulas in order to meet changing consumer preferences and customer needs.
Our Vision 2020 Strategy in Flavors builds upon our strengths and focuses on addressing industry trends that will allow us to differentiate ourselves from our competitors and deliver accelerated growth. These trends include:
(1) Consumer Demand for Fresh, Authentic and Natural Products. As evidenced by recent trends in product labeling, consumers increasingly seek to understand what they are consuming. Our objective is to expand our naturals capabilities by offering our customers naturals and proprietary ingredients.
(2) Consumer Demand for Products That Promote Health and Wellness. Consumers, especially those in developed markets such as the United States and Western Europe, are increasingly seeking to focus on products which promote health and wellness and taste good. Often, this demand is translated into a desire to provide consumer products with reduced fat and salt. Our objective is to capture a significant share of this shift in consumer demand by continuing to expand our modulation technology, delivery systems and our naturals and proprietary ingredients.
(3) Expansion of Consumer Food Companies. The number of participants in the food industry continues to expand drastically, with mid-sized regional companies and companies focused on niche-product categories joining the traditional global companies to drive and accelerate product innovation. We intend to look for innovative and value-creating methods for serving this growing customer base as evidenced by our recent acquisition of Ottens Flavors which we believe will permit us to further penetrate small and mid-sized customers by delivering tailored solutions with the necessary agility, speed and responsiveness.
(4) New Sources of Protein. Sustainability concerns are driving the food industry to evaluate non-traditional sources of protein. As part of our R&D initiatives we seek to develop a comprehensive understanding of flavor interaction with protein and texture and develop taste solutions for new or alternative protein sources.
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. Our Fragrance business is a vertically integrated operation, originating with the development in our research laboratories of naturals, synthetic and proprietary molecules and innovative delivery systems, progressing to our manufacturing facilities that produce these ingredients in a consistent, high-quality and cost-effective manner and transitioning to our creative centers where our
perfumers partner with our customers to create unique fragrance compounds for use in a variety of end-use products.
By providing our fragrance development teams an extensive portfolio of innovative, high-quality and cost-effective ingredients to support their creativity, we are able to provide our customers with a unique identity for their brands. These ingredients or fragrance compounds can then be combined with our innovative delivery systems, including (i) our proprietary encapsulation technology, which consists of individual fragrance droplets coated with a protective polymetric shell to deliver superior fragrance performance throughout a product’s lifecycle and (ii) our exclusive polymer delivery system, PolyIFF, which is a “solid fragrance” technology that allows us to add scent to functional or molded plastic. These delivery systems are key differentiators that fuel the growth of our consumer fragrance compounds.
Our Fragrances business derives revenues from two sources, Fragrance Compounds and Ingredients.
Fragrance Compounds. Fragrance Compounds are unique and proprietary combinations of multiple ingredients that are ultimately used by our customers in their consumer goods. Our creative and commercial teams within Fragrance Compounds are organized into two broad categories: Fine Fragrances and Consumer Fragrances:
Fine Fragrances - Fine Fragrances focuses on perfumes and colognes. IFF’s scientists and perfumers collaborate to develop new molecules, new natural extractions, and innovative processes that enliven perfumers' palettes and help them create unique, inspiring fragrances. We have created some of the industry-leading fine fragrance classics as well as cutting-edge niche fragrances, as evidenced by the number of top sellers and the successes of our new launches.
Ingredients. While the principal role of our fragrance ingredients facilities is to support our Fragrance Compounds business, we utilize our excess manufacturing capacity to manufacture and sell certain fragrance ingredients to third parties. We believe that this business allows us to leverage our fixed costs while maintaining the security of supply for our perfumers and ultimately our customers. Ingredients available for sale to third parties include innovative ingredients that leverage our manufacturing experience as well as a limited amount of cost-competitive, commodity ingredients. As our Fragrance Compounds business grows, we expect that the percentage of capacity allocated to the production of fragrance ingredients for sale to third parties will decrease.
With approximately 1,000 separate fragrance, active and functional cosmetic active ingredients, plus additional botanicals and delivery systems acquired in the recent Lucas Meyer transaction, we believe we are a leader in the industry with the breadth of our product portfolio.
Our Vision 2020 strategy in Fragrances builds upon our strengths to differentiate ourselves from our competitors and deliver accelerated growth. Specifically, we intend to focus on:
(2) Transparency in Labeling. As consumers worldwide seek to require transparency in labeling, our customers will progressively seek to differentiate their products through proprietary molecules and unique delivery systems. A major emphasis of our research program is the creation of new proprietary molecules and ingredients.
(3) Sustainability. Consumers aspire to purchase products that are earth-friendly and sustainable. As part of Vision 2020, we have committed to strengthen our sustainable practices and become the leader within our industry.
(4) Delivery Systems. We continue to invest in our delivery system technologies, including expansion of our market-leading encapsulation technology, which we believe will allow us to differentiate our products and those of our customers. Our encapsulation technology extends, controls the release of and increases aromas in a variety of consumer products. With our acquisition of Lucas Meyer, we expanded our portfolio to offer multi-functional delivery systems with cosmetic actives that work to enhance skin penetration, protect the active against interactions with other ingredients, provide long-lasting
release, facilitate formulation of challenging ingredients and allow a better-targeted action.
Our Fragrances business collaborates with some of the world’s leading art and fashion schools to tap into the creative minds of the future leaders of fashion and design. We collaborate with scientists, writers, artists, musicians and film makers to expose our perfumers to new and constantly evolving creative territories and approaches.
We consider our R&D development infrastructure to be one of our key competencies and we focus and invest substantial resources in the research and development of new and innovative compounds, formulas and technologies and the application of these to our customers’ products. We spend approximately 8% of our sales on the research, development and implementation of new molecules, compounds and technologies that help our customers respond to changing consumer preferences. Using the knowledge gained from our Consumer Insights program, we strategically focus our resources around key R&D platforms that address consumer needs or preferences, or anticipate future preferences. By aligning our resources around these platforms, we ensure the proper support and focus for each program so that it can be further developed and eventually accepted for commercial application. As a result of this investment, we have been granted 305 patents in the United States since 2000, including 15 in 2015, and we have developed many unique molecules and delivery systems for our customers that are used as the foundations of successful flavors and fragrances around the world.
As of December 31, 2015, we employed about 1,400 people globally in R&D activities. We spent $246.1 million, $253.6 million and $259.8 million, or approximately 8%, 8% and 9% of sales in 2015, 2014 and 2013, respectively, on R&D activities.
Our ingredients research program discovers molecules found in natural substances and creates new molecules that are subsequently tested for their sensorial value. To broaden our offerings of natural, innovative and unique products, we seek collaborations with research institutions and other companies throughout the world. We have established a number of such collaborations, for example, our ongoing relationship with Amyris, to strengthen the pipeline of new and innovative molecules that we expect to launch in the coming years. To further strengthen and broaden technology offerings and capabilities, we acquired Lucas Meyer in 2015 to expand our product portfolio of ingredients for the cosmetic and personal care industries.
The development of new and customized flavor and fragrance compounds is a complex process calling upon the combined knowledge of our scientists, flavorists and perfumers. Scientists from various disciplines work in project teams with flavorists and perfumers to develop flavor and fragrance compounds with consumer preferred performance characteristics. The development of new flavor and fragrance compounds requires (i) an in-depth knowledge of the flavor and fragrance
characteristics of the various ingredients we use, (ii) an understanding of how the many ingredients in a consumer product interact and (iii) the creation of controlled release and delivery systems to enhance flavor and fragrance performance. To facilitate this process, we have a scientific advisory board comprised of five leading scientists that provide external perspectives and independent feedback on our R&D initiatives.
We also have a network of 33 creative centers around the world where we create or adapt the basic flavors or fragrances that we have developed in the R&D process to commercialize for use in our customers’ consumer products. Our global creative teams consist of perfumers, fragrance evaluators and flavorists, as well as marketing, consumer insights and technical application experts, from a wide range of cultures and nationalities. In close partnership with our customers’ product development groups, our creative teams create the scents and tastes that our customers are seeking in order to satisfy consumer demands in each of their markets.
We use both natural and synthetic ingredients in our compounds. We purchase approximately 9,000 different raw materials from about 2,500 domestic and international suppliers. Approximately half of the materials we purchase are naturals or crop-related items and the other half are synthetics and chemicals. Natural ingredients are derived from flowers, fruits and other botanical products as well as from animal products. They contain varying numbers of organic chemicals that are responsible for the fragrance or flavor of the natural product. Natural products are purchased in processed or semi-processed form. Some are used in compounds in the state in which they are purchased and others are used after further processing. Natural products, together with various chemicals, are also used as raw materials for the manufacture of synthetic ingredients by chemical processes. Our flavor products also include extracts and seasonings derived from various fruits, vegetables, nuts, herbs and spices as well as microbiologically-derived ingredients. We manufacture most of our synthetic ingredients for use in our fragrance compounds as well as for sale to others.
We have 34 manufacturing sites around the world that support more than 38,000 products. Our major manufacturing facilities are located in the United States, the Netherlands, Spain, Great Britain, Turkey, Brazil, Mexico, China, India, and Singapore. Our supply chain initiatives in developing markets are focused on increasing capacity and investments in key technologies. Within our more mature markets, we tend to focus on consolidation and cost optimization as well as implementing new technologies. In addition to our own manufacturing facilities, we develop relationships with third parties
that permit us to expand access to the technologies, capabilities and capacity that we need to better serve our customers.
In 2015, we continued to invest in our facilities. We expanded our flavors facility located near Johannesburg, South Africa, to add flavor creation, application and sensory laboratories, and a pilot plant. We opened a new flavors facility in the U.S. near Chicago, Illinois and a new creative center and expansion of our manufacturing facilities in Gebze, Turkey. In addition to ongoing construction of a new manufacturing facility in Jakarta, Indonesia, we recently approved a new capital project to construct a second manufacturing facility in China and also initiated a study regarding our existing footprint and manufacturing capabilities that serve the Indian market.
As a leading global creator of flavors and fragrances for a wide variety of consumer products, sustainability has been an important part of how we do business. Our sustainability strategy, which is closely aligned with our Vision 2020 strategy, was first formalized in 2011 and consists of four pillars: our products; our impact; our sources; and our people. While the industry and our Company constantly evolve, we are committed to conducting our business in line with our dedication to the environment, to society and to the shareholders, customers and others that have placed their confidence in us. In 2015, we became a member of the World Business Council for Sustainable Development. We also became the first flavors and fragrances company to join the Together for Sustainability initiative and enter into growing consortium of multinational companies committed to ensuring sustainable practices throughout the supply chain. We were recognized by the CDP, earning a perfect score of 100 in disclosure and an A in performance for our strategies and actions to mitigate climate change. In addition, IFF-LMR Naturals received its fourth For Life Social Responsibility designation, in cooperation with our Vetiver partner in Haiti. The For Life designation recognizes an organization’s adherence to specific sustainability criteria, including transparency, environmental responsibility, fair working conditions and positive relations with producers and local communities.
In addition, we are subject to various rules relating to health, work safety and the environment at the local and international levels in the various countries in which we operate. Our manufacturing facilities throughout the world are subject to environmental standards relating to air emissions, sewage discharges, the use of hazardous materials, waste disposal practices and clean-up of existing environmental contamination. In recent years, there has been a significant increase in the stringency of environmental regulation and enforcement of environmental standards, and the costs of compliance have risen significantly. We expect that the trend of increased regulation will continue in the future.
Our products and operations are subject to regulation by governmental agencies in each of the markets in which we operate. These agencies include (1) the Food and Drug Administration and equivalent international agencies that regulate flavors and other ingredients in consumer products, (2) the Environmental Protection Agency and equivalent international agencies that regulate our manufacturing facilities, (3) the Occupational Safety and Health Administration and equivalent international agencies that regulate the working conditions in our manufacturing, research laboratories and creative centers, (4) local and international agencies that regulate trade and customs, (5) the Drug Enforcement Administration and other local or international agencies that regulate controlled chemicals that we use in our operations and (6) the Chemical Registration/Notification authorities that regulate chemicals that we use in, or transport to, the various countries in which we manufacture and/or market our products. We have seen an increase in registration and reporting requirements concerning the use of certain chemicals in a number of countries.
The flavors and fragrances market is part of a larger market which supplies a variety of ingredients and components
that consumer products companies utilize in their products. The broader market includes large multinational companies or smaller regional and local participants which supply products such as seasonings, texturizers, spices, enzymes, certain food-related commodities, fortified products and cosmetic ingredients.
Large multinational customers and, increasingly, mid-sized customers, may limit the number of their suppliers by placing some on “core lists,” giving them priority for development and production of their new or modified products.
At December 31, 2015, we had approximately 6,700 employees worldwide, of whom approximately 1,550 are employed in the United States. We believe that relations with our employees are good.
The current executive officers of the Company, as of March 1, 2016, are listed below.
Alison A. Cornell has served as our Executive Vice President and Chief Financial Officer since July 2015. Prior to joining us, Ms. Cornell served as Corporate Senior Vice President and Chief Financial Officer of Covance Inc., a global drug development company, a position to which she was promoted in May 2012 after serving in two vice president positions of increasing responsibility. Prior to joining Covance in 2004, Ms. Cornell spent 19 years with AT&T, where she held leadership roles and positions of increasing responsibility. Ms. Cornell holds a Bachelor of Arts in psychology and a Master of Business Administration in marketing from Rutgers University. She is a graduate of the Program for Management Development at Harvard Business School, as well as numerous other professional development programs.
Ahmet Baydar has served as our Executive Vice President, Research and Development since August 2015, as our Senior Vice President, Research and Development from September 2010 to August 2015, and as our Vice President, Global Fragrance Research from February 2009 to August 2010. Prior to joining us, Dr. Baydar served as a Director of Shave Care and Integrated Shaving Systems at The Procter & Gamble Company, a branded consumer packaged goods company, and Vice President of R&D-Personal Care at The Gillette Company, a personal care products company.
Angelica T. Cantlon has served as our Executive Vice President, Chief Human Resources Officer since August 2015 and as our Senior Vice President, Human Resources from August 2009 to August 2015. Prior to joining us, Ms. Cantlon served as Senior Vice President-International Chief Administrative Officer of MetLife, Inc., an insurance and financial services company, from June 2005 to August 2009, and Senior Vice President- Human Resources Business Leader, of Metlife from September 1999 to June 2005.
The market for flavors and fragrances is highly competitive. We face vigorous competition from companies throughout the world, including multinational and specialized flavor, fragrance and cosmetic ingredients companies, as well as consumer product companies who may develop their own flavors, fragrances or cosmetic ingredients. In the flavors industry, we also face increasing competition from ingredient suppliers that have expanded their portfolios to include flavor offerings. Some of our competitors specialize in one or more of our product sub-segments, while others participate in many of our product sub-segments. In addition, some of our global competitors may have greater resources than we do or may have proprietary products that could permit them to respond to changing business and economic conditions more effectively than we can. Consolidation of our competitors may exacerbate these risks. As we are new to cosmetic ingredients, we may face greater competition-related risks in this industry than with our core historic flavor and fragrances business.
Competition in our business is based on innovation, product quality, regulatory compliance, pricing, quality of customer service, the support provided by marketing and application groups, and understanding of consumers. It is difficult for us to predict the timing, scale and success of our competitors’ actions in these areas. The discovery and development of new flavor and fragrance materials, protection of the Company’s intellectual property and development and retention of key employees are important issues in our ability to compete in our business. Increased competition by existing or future competitors, including aggressive price competition, could result in the potential loss of substantial sales or create the need for us to reduce prices or increase spending and this could have an adverse impact on sales and profitability.
During 2015, our 25 largest customers accounted for 52% of our sales, and sales to our largest customer accounted for 12% of our sales in each of the last three fiscal years. Disruption of sales to this customer or any of our other large customers for an extended period of time could adversely affect our business or financial results.
Large multinational customers, and increasingly, mid-sized customers are unilaterally limiting the number of their suppliers or rationalizing the number of products that they offer to increase their margins and profitability. As part of these initiatives, these customers are creating “core lists” of suppliers and giving these “core lists” suppliers priority for new or modified products. Recently, these customers are making inclusion on their “core lists” contingent upon a supplier providing more favorable commercial terms which may adversely affect our margins. These, and other profitability initiatives being pursued by our customers, reduce the market opportunity for which we compete and subject the volume and pricing of the remaining suppliers to downward pressure. To compete more successfully in this environment, we must continue to make investments in customer relationships and tailor product research and development in order to anticipate customers’ needs, deliver supplies that contribute to our customers’ profitability, provide effective service and offer competitive cost-in-use solutions to secure and maintain inclusion on certain “core lists” and our share of our customers’ purchases. If we are unable to do so, it could adversely impact our future results of operations.
As part of our new Vision 2020 strategy, we intend to add between $500 million and $1.0 billion of sales growth through acquisitions within the flavors and fragrances industries and adjacencies. During 2015, we negotiated and closed two acquisitions which align with this strategic objective. Specifically, in May 2015, we completed the acquisition of Ottens
Flavors, a flavor supplier and developer and in July 2015, we completed the acquisition of Lucas Meyer Cosmetics, a developer, manufacturer and marketer of cosmetic active ingredients.
Identifying suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to identify suitable candidates or complete acquisitions in a timely manner, on a cost-effective basis or at all. Even if we complete an acquisition, we may not realize the anticipated benefits of such acquisition. Our recent acquisitions have required, and any similar future transactions may also require, significant efforts and expenditures, including with respect to integrating the acquired business with our historical business. We may encounter unexpected difficulties, or incur unexpected costs, in connection with acquisition activities and integration efforts, which include:
potential disruption of our historical core business of the acquired business;
the challenges related to the lack of experience in operating in the geographical or product markets of the acquired business;
the difficulties in assimilating employees and corporate cultures or in integrating systems and controls;
difficulties in anticipating and responding to actions that may be taken by competitors in response to the acquisitions;
potential loss of key employees, customers, suppliers or other partners of the acquired business; and
The failure of key information technology systems or a breach of our information security may adversely affect our ability to conduct our business, subject us to increased operating costs and expose us to litigation.
We rely on information technology systems, including some managed by third-party providers, to conduct business and support our business processes, including product formulas, product development, sales, order processing, production, distribution, finance and intra-company communications throughout the world. These systems may be susceptible to disruptions or outages due to fire, floods, power loss, telecommunications failures, natural disasters, cyber attacks and similar events, or due to the poor performance of third-party providers. Effective response to such disruptions will require effort and diligence on the part of our employees and third-party providers to avoid any adverse impact to our business. In addition, our systems and proprietary data stored electronically may be vulnerable to computer viruses, cybercrime, computer hacking and similar information security breaches, which in turn could result in the unauthorized release or misuse of confidential or proprietary information about our business (including, but not limited to, the trade secrets upon which we rely to protect our proprietary fragrance and flavor formulations), employees, or customers, and disrupt our operations. Depending on their nature and scope, these threats could potentially lead to improper use of our systems and networks, manipulation and destruction of data or product non-compliance. The occurrence of any of these events could adversely affect our sales, subject us to increased operating costs and expose us to litigation.
The industries in which our customers operate are expanding and becoming increasingly decentralized, and if we and/or our customers are unable to adjust, our operating results and future growth may be adversely affected.
Our customers include large food and beverage companies, which operate in highly competitive industries and rely on continued consumer demand for their products. In recent years many of our customers have faced growing competition from mid-size regional companies and companies focused on niche-product categories driving and accelerating product innovation. Consequently, the food and beverage industry is expanding and becoming increasingly decentralized. If our customers fail to adequately address the challenges pertaining to this expansion and decentralization of business, it may adversely affect their operations or financial performance, and could have a corresponding material adverse effect on us. If our global customers’
market shares continue to erode and we are unable to gain market share with small and mid-sized customers in this evolved environment, our operating results and future growth could be adversely affected.
We have made investments in and are expanding our business into emerging markets, which exposes us to certain risks.
As part of our growth strategy, we have increased our presence in emerging markets by expanding our manufacturing presence, sales organization and product offerings in these markets, and we expect to continue to focus on expanding our business in these markets. In addition to the currency and international operation risks described below, our operations in these markets may be subject to a variety of other risks. Emerging markets typically have a consumer base with limited or fluctuating disposable income and customer demand in these markets may fluctuate accordingly. As a result, decrease in customer demand in emerging markets may have an adverse effect on our ability to execute our growth strategy. In addition, emerging markets may have weak legal systems which may affect our ability to enforce our intellectual property and contractual rights, exchange controls, unstable governments and privatization or other government actions that may affect taxes, subsidies and incentive programs and the flow of goods and currency. In conducting our business, we move products from one country to another and may provide services in one country from a subsidiary located in another country. Accordingly, we are vulnerable to abrupt changes in customs and tax regimes that may have significant negative impacts on our financial condition and operating results.
Our ability to differentiate ourselves and deliver growth in line with our Vision 2020 strategy largely depends on our ability to successfully develop and introduce new products and product improvements that meet our customers’ needs, and ultimately appeal to consumers. Innovation is a key element of our ability to develop and introduce new products. We cannot be certain that we will successfully achieve our innovation goals, such as the development of new molecules, new and expanded delivery systems and other technologies. We currently spend approximately 8% of our sales on research and development; however, such investments may only generate future revenues to the extent that we are able to successfully develop products that meet our customers’ specifications, can be delivered at an acceptable cost in use and are accepted by the targeted consumer market. Furthermore, there may be significant lag times from the time we incur R&D costs to the time that these R&D costs may result in increased revenue. Consequently, even when we “win” a project, our ability to generate revenues as a result of these investments is subject to numerous customer, economic and other risks that are outside of our control, including delays by our customers in the launch of a new product, the level of promotional support for the launch, poor performance of our third-party vendors, anticipated sales by our customers not being realized or changes in market preferences or demands, or disruptive innovations by competitors.
We must continually anticipate and react, in a timely and cost-effective manner, to changes in consumer preferences and demands, including changes in demand driven by increasing awareness of health and wellness and demands for transparency with respect to product ingredients. Consumers, especially in developed economies such as the United States and Western Europe, are shifting away from products containing artificial ingredients to “all natural,” healthier alternatives. In addition, there has been a growing demand by consumers and governmental agencies to provide more transparency in product labeling and our customers have been taking steps to address this demand, including by voluntarily providing product-specific fragrance ingredients disclosure. These two trends could affect the types and volumes of our flavors and fragrances that our customers include in their product offerings. If we are unable to react to or anticipate these trends in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
From time to time and in line with our new Vision 2020 strategy, we may evaluate and enter into collaborations, joint ventures or partnerships to enhance our research and development efforts. Our ability to generate revenues from such collaborations will depend on our partners’ abilities and efforts to successfully perform the functions assigned to them in these arrangements. The process of establishing and maintaining collaborative relationships is difficult, time-consuming to negotiate, document and implement. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements should we choose to enter into such arrangements, and the terms of the arrangements may not be favorable to us. Additionally, collaborations may not lead to development or commercialization of products in the most efficient manner, or at all. If we are
unable to establish and maintain collaborative relationships on acceptable terms or to successfully transition terminated collaborative agreements, it could limit our ability to execute our Vision 2020 strategy and adversely affect our future growth.
We have significant operations outside the United States, the results of which are reported in the local currency and then translated into United States dollars at applicable exchange rates for inclusion in our consolidated financial statements. The exchange rates between these currencies and the United States dollar have fluctuated and will continue to do so in the future. Changes in exchange rates between these local currencies and the United States dollar will affect the recorded levels of sales, profitability, assets and/or liabilities. For example, the weakening of the Euro and several emerging market currencies in 2015 resulted in approximately $33 million impact on operating profit versus 2014. Additionally, volatility in currency exchange rates may adversely impact our financial condition, cash flows or liquidity. Although we employ a variety of techniques to mitigate the impact of exchange rate fluctuations, including sourcing strategies and a limited number of foreign currency hedging activities, we cannot guarantee that such hedging and risk management strategies will be effective, and our results of operations could be adversely affected.
We operate on a global basis, with manufacturing and sales facilities in the United States, Europe, Africa, the Middle East, Latin America, and Greater Asia. During 2015, 77% of our net sales were to customers outside the United States and we intend to continue expansion of our international operations. As a result, our business is increasingly exposed to risks inherent in international operations. These risks, which can vary substantially by location, are also described in many of the risk factors in this section and include the following:
governmental laws, regulations and policies adopted to manage national economic conditions, such as increases in taxes, austerity measures that may impact consumer spending, monetary policies that may impact inflation rates, currency fluctuations and sustainability of resources;
national and regional labor strikes in the countries in which we operate; or
Volatility and challenging economic conditions may adversely affect demand for consumer products using flavors and fragrances (including cosmetic active ingredients) may have a negative impact on our operating results and future growth.
Our flavors and fragrances (including cosmetic active ingredients) are components of a wide assortment of global consumer products throughout the world. Historically, demand for consumer products using flavors and fragrances (including cosmetic active ingredients) was stimulated and broadened by changing social habits and consumer needs, population growth, an expanding global middle-class and general economic growth, especially in emerging markets. The global economy has experienced significant recessionary pressures and declines in consumer confidence and economic growth. While some segments of the global economy appear to be recovering, the ongoing global recessionary economic environment in Europe has, and may in the near future, increase unemployment and underemployment, decrease salaries and wage rates, increase inflation or result in other market-wide cost pressures that will adversely affect demand for consumer products in both developed and emerging markets.
In addition, growth rates in the emerging markets have moderated from previous levels. Reduced consumer spending may cause changes in our customer orders including reduced demand for our flavors and fragrances (including cosmetic active ingredients), or order cancellations. For example, recent challenging economic conditions in China and Latin America, which culminated in the weakening of the Chinese yuan, Brazilian real and Argentinian peso, have undermined consumer confidence and resulted in our customers throughout the emerging markets taking a more cautious approach to managing their inventory.
It is currently anticipated that these challenging economic conditions will continue during 2016. To the extent that the volatility in global economic conditions continues, our sales, profitability and overall operating results could be adversely affected.
Our business operations and properties are subject to extensive and increasingly stringent federal, state, local and foreign laws and regulations pertaining to protection of the environment, including air emissions, sewage discharges, the use of hazardous materials, waste disposal practices and clean-up of existing environmental contamination. Failure to comply with these laws and regulations or any future changes to them may result in significant consequences to us, including the need to close or relocate one or more of our production facilities, administrative, civil and criminal penalties, liability for damages and negative publicity. If we are unable to meet production requirements, we can lose customer orders, which can adversely affect our future growth or we may be required to make incremental capital investments to ensure supply. For example, in 2015 Chinese authorities notified us of compliance issues pertaining to the emission of odors from several of our plants in China and, consequently, our Flavors facility in China was temporarily idled and another facility was required to modify its production schedule. As a result of these issues, we invested approximately $6.5 million in odor-abatement equipment at these facilities and have approved a new capital project of approximately $45 million to construct a second flavors manufacturing facility in China. Such idling of facilities or production modifications has caused or may cause customers to seek alternate suppliers due to concerns regarding supply interruptions and these customers may not return or may order at reduced levels even once issues are remediated. If these non-compliance issues reoccur in China or occur or in any other jurisdiction, we may lose business and may be required to incur capital spending above previous expectations, close a plant, or operate a plant at significantly reduced production levels on a permanent basis, and our operating results and cash flows from operations may be adversely affected.
As part of our strategy, we seek to enhance our manufacturing efficiency and align our geographic manufacturing footprint with our expectations of future growth and technology needs. Many of our facilities are located in close proximity to our customers in order to minimize both our customers’ and our own costs. However, we may not have sufficient demand to utilize all of our production capacity and may be required to ship excess products to other regions in which we operate, which will increase our costs and decrease our margins. To operate more efficiently and control costs, from time to time we also execute rationalization activities, which include manufacturing facility consolidations. For example, we are in the midst of relocating our Ingredients facility in Hangzhou, China and constructing a new flavors site in Indonesia. We have also initiated a study regarding our existing footprint and manufacturing capabilities that serve the Indian market. The spending associated with these projects may result in capital spending above previous expectations. Our ability to realize anticipated cost savings, synergies and revenue enhancements from these activities may be affected by a number of factors and may pose significant risks, including:
We use many different raw materials for our business, including essential oils, extracts and concentrates derived from fruits, vegetables, flowers, woods and other botanicals, animal products, raw fruits, organic chemicals and petroleum-based chemicals. While raw material costs have been relatively stable during 2015, historically, we have experienced a considerable amount of price volatility in natural products that represent approximately half of our raw material purchases. Availability and pricing of these natural products can be impacted by crop size and quality, weather, alternative land use, and other factors which we cannot control.
Gaps in our operational processes could adversely affect the quality of our finished products and result in a regulatory non-compliance event. If a product non-compliance event were to go undetected, it could subject us to customer claims, recalls, penalties, litigation costs and settlements, remediation costs or loss of sales. As our flavors, fragrances and cosmetic actives are used as ingredients in many products meant for human use or consumption, these consequences would be exacerbated if we or our customer did not identify the defect before the product reaches the consumer and there was a resulting impact at the consumer level. Such a result could lead to potentially large scale adverse publicity, recalls and potential consumer litigation. Furthermore, adverse publicity about our products, including concerns about product safety or similar issues, whether real or perceived, could harm our reputation and result in an immediate adverse effect on our sales and customer relationships, as well as require us to utilize significant resources to rebuild our reputation.
As a company engaged in research and development, manufacturing and distribution on a global scale, we are subject to the risks inherent in such activities, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in supply chain or information systems,disruption or loss of key research or manufacturing sites, product quality control, safety, licensing requirements and other regulatory issues, as well as natural disasters and other external factors over which we have no control. While we have research and development and manufacturing facilities throughout the world, many of these facilities are extremely specialized and certain of our facilities are the sole source of a specific ingredient or product. If our research and development activities or the manufacturing of ingredients or products were disrupted, the cost of relocating or replacing these activities or reformulating these ingredients or products may be substantial, which could result in production or development delays or otherwise have an adverse effect on our margins, operating results and future growth.
From time to time we are involved in a number of legal claims and litigation, including claims related to intellectual property, product liability, environmental matters and indirect taxes. We cannot predict the ultimate outcome of such litigation. In addition, we cannot provide assurance that future events will not result in an increase in the number of claims or require an
increase in the amount accrued for any such claims, or require accrual for one or more claims that has not been previously accrued. In addition, if we were found liable, we could be subject to certain indemnification claims. There can be no assurance that our insurance will be adequate to protect us from all material expenses related to pending and future claims or that such levels of insurance will be available in the future at economical prices.
A significant portion of our assets consists of long-lived assets, including tangible assets such as our manufacturing facilities, and intangible assets and goodwill. As of December 31, 2015, we had recorded $1.2 billion of intangible assets and goodwill including goodwill and intangible assets related to our acquisitions. Long-lived assets are subject to an impairment analysis whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Additionally, goodwill is subject to an impairment test at least annually. Indicators such as underperformance relative to historical or projected future operating results, changes in the Company’s strategy for its overall business or use of acquired assets, unexpected negative industry or economic trends, decreased market capitalization relative to net book values, unanticipated competitive activities, change in consumer demand, loss of key personnel and acts by governments and courts may signal that an asset has become impaired. To the extent any of our acquisitions do not perform as anticipated, whether due to internal or external factors, the value of such assets may be negatively affected and we may be required to record impairment charges. Our results of operations and financial position in future periods could be negatively impacted should future impairments of our long-lived assets, including intangible assets or goodwill occur.
We have and will continue to implement transfer pricing policies among our various operations located in different countries. These transfer pricing policies are a significant component of the management and compliance of our operations across international boundaries and overall financial results. Many countries routinely examine transfer pricing policies of taxpayers subject to their jurisdiction, challenge transfer pricing policies aggressively where there is potential non-compliance and impose significant interest charges and penalties where non-compliance is determined. There can be no assurance that a governmental authority will not challenge these policies more aggressively in the future or, if challenged, that we will prevail. We could suffer significant costs related to one or more challenges to our transfer pricing.
We are subject to the continual examination of our income tax returns by the Internal Revenue Service and foreign tax authorities in those countries in which we operate, and we may be subject to assessments or audits in the future in any of the
countries in which we operate. The final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals, and while we do not believe the results that follow would have a material adverse effect on our financial condition, such results could have a material effect on our income tax provision, net income or cash flows in the period or periods in which that determination is made.
In addition, a number of international legislative and regulatory bodies have proposed legislation and begun investigations of the tax practices of multinational companies and, in the European Union (“EU”), the tax policies of certain EU member states. One of these efforts has been led by the OECD, an international association of 34 countries including the United States, which has finalized recommendations to revise corporate tax, transfer pricing, and tax treaty provisions in member countries. Since 2013, the European Commission (“EC”) has been investigating tax rulings granted by tax authorities in a number of EU member states with respect to specific multinational corporations to determine whether such rulings comply with EU rules on state aid, as well as more recent investigations of the tax regimes of certain EU member states. Under EU law, selective tax advantages for particular taxpayers that are not sufficiently grounded in economic realities may constitute impermissible state aid. If the EC determines that a tax ruling or tax regime violates the state aid restrictions, the tax authorities of the affected EU member state may be required to collect back taxes for the period of time covered by the ruling. In late 2015 and early 2016, the EC declared that tax rulings by tax authorities in Luxembourg, the Netherlands and Belgium did not comply with the EU state aid restrictions. If the EC were to successfully challenge tax rulings applicable to us in any of the EU member states in which we are subject to taxation, we could be exposed to increased tax liabilities.
During 2013, the Company reached a settlement with the Spanish tax authorities with respect to assesments imposed in connection with the 2011 fiscal year audit, and paid Euro 3.9 million ($5.2 million based on the exchange rate at the payment date).
With respect to the audits of 2002-2003 fiscal years, the Spanish tax authorities imposed assessments aggregating Euro 22.4 million ($28.6 million), including aggregate estimated interest. The Company appealed these assessments, however, in February 2013, the Appellate Court upheld the administrative ruling with respect to the 2003 tax assessment and the related tax avoidance claims. The Company decided not to pursue the appeals process with respect to the 2003 tax assessment and paid Euro 20.8 million ($27.3 million based on the exchange rate at the respective payment dates) in connection with the 2003 tax assessment in 2013. In June 2013, the Appellate Court ruled against us on our appeal of the 2002 income tax assessment and related claims, which the Company also decided not to appeal. However, this case did not have a related tax exposure associated with it. In an unrelated matter, there was a remaining aggregate assessment related to the 2002 fiscal year of Euro 1.9 million ($2.3 million) as of December 31, 2014, which was under appeal. During the first quarter of 2015, the Company received a favorable ruling on this appeal and accordingly, reversed the total reserve related to the 2002 fiscal year (with a value of Euro 1.9 million or $2.3 million).
In addition to the above, the Company was also a party to four dividend withholding tax controversies in Spain in which the Spanish tax authorities alleged that the Company’s Spanish subsidiaries underpaid withholding taxes during the 1995-2001 fiscal years. The Company had previously appealed each of these controversies. During 2012, the Company received unfavorable decisions on the first three cases. As a result of these rulings, during 2012 the Company (i) recorded charges (including estimated interest) of approximately $12.0 million after-tax and (ii) made payments of Euro 9.8 million ($12.8 million based on exchange rate at the respective payment dates). The fourth case was heard by the Spanish National High Court in October 2014, and we received a favorable ruling. Accordingly, during the fourth quarter of 2014, we reversed the total reserve related to the 2001 fiscal year (with a value of Euro 3.6 million of $4.3 million). As of December 31, 2015, all dividend withholding tax controversies in Spain have now been resolved. The Company made total payments of Euro 4.5 million ($4.9 million) during the second quarter of 2015 related to the resolution of the three controversies.
Separately, the Spanish tax authorities alleged claims for a capital tax in a case arising from similar allegations as the income tax cases (discussed in further detail in Note 10). In connection with the 2002 income tax assessment ruling discussed in Note 10, 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 have reversed the previously recorded provision of Euro 9.8 million ($10.5 million) for the year ended December 31, 2015.
Number of shareholders of record as of February 15, 2016
Base Period 2010
Alberto Culver Company (included through 5/9/11)
The Cumulative Shareholder Return assumes that the value of an investment in our Common Stock and each index was $100 on December 31, 2010, and that all dividends were reinvested.
Due to the international scope and breadth of our business, we believe that a Peer Group comprising international public companies, which are representative of the customer group to which we sell our products, is the most appropriate group against which to compare shareholder returns. Alberto Culver Company ceased trading on May 9, 2011 and has only been included through that date. In July 2012, Sara Lee Corp. spun off certain of its businesses and changed its name to Hillshire Brands Co. Heinz (HJ) Co was acquired by Hawk Acquisition Holding Corp on June 7, 2013 and has only been included through that date. Hillshire Brands Co was acquired by Tyson Foods on August 28, 2014 and has only been
included through that date. Edgewell Personal Care has been included starting from July 1, 2015 when it spun off from Energizer Holdings.
The table below reflects shares of common stock we repurchased during the fourth quarter of 2015.
262,496,041
248,498,869
236,740,882
Shares were repurchased pursuant to the repurchase program originally announced in December 2012, with repurchases beginning in the first quarter of 2013. In August 2015, the Board of Directors amended the program, authorizing an additional $250 million and extending the program through December 31, 2017. Repurchases under the amended program are limited to $500 million in total repurchase price, and the expiration date is December 31, 2017. Authorization of the repurchase program may be modified, suspended, or discontinued at any time.
Diluted(c)(e)
Related to accelerated depreciation associated with a plant closing in Asia.
Reversal of Spanish capital tax charge
Associated with plant closings and other organizational realignments in Europe and Asia.
Accelerated depreciation associated with the Fragrance Ingredients Rationalization.
Net gain related to the sale of a non-operating asset.
Associated with the favorable ruling of the 2011 Spanish dividend withholding case.
The 2015 amount includes $6,825 ($4,516 after tax) of costs related to the fair value step-up of inventory for the Ottens Flavors and Lucas Meyer acquisitions and $1,115 ($836 after tax) of operational improvement initiative costs in Europe and Asia. The 2014 amount includes $7,641 ($5,221 after tax) of accelerated depreciation associated with the Fragrance Ingredients rationalization and operational improvement initiative costs in Europe and Asia. The 2013 amount includes
$8,770 ($6,084 after tax) of accelerated depreciation associated with the Fragrance Ingredients rationalization and several locations in Asia.
The 2015 amount includes $10,530 ($7,582 after tax) of reversal of the previously recorded provision for the Spanish capital tax case, $7,192 of expense for the acceleration of the contingent consideration payments related to the Aromor acquisition. The 2013 amount includes $13,011 ($9,108 after tax) of expense associated with the Spanish capital tax case and $33,495 ($29,846 after tax) in 2011 of costs associated with the Mane patent litigation settlement.
Restructuring and other charges $5,292 after tax in 2015, $844 after tax in 2014, $1,398 after tax in 2013, $1,047 after tax in 2012, and $9,444 after tax in 2011 were the result of various restructuring and reorganization programs of the Company.
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.
During the third quarter of 2015, we completed the acquisition of 100% of the outstanding shares of Lucas Meyer Cosmetics, a business of Unipex Group, ("Lucas Meyer") for approximately Euro 284.0 million ($312.0 million). (The total shares acquired include shares effectively acquired pursuant to put and call option agreements). This acquisition did not have a material impact on our Consolidated Statement of Comprehensive Income. The acquisition strengthened and expanded Fragrance Ingredients.
During the second quarter of 2015, we completed the acquisition of 100% of the outstanding shares of Henry H. Ottens Manufacturing Co., Inc. ("Ottens Flavors") for $198.9 million. The acquisition did not have a material impact on our consolidated financial statements. The acquisition strengthened our flavors market position in the targeted North American market.
Our 25 largest customers accounted for 52% of total sales in 2015; this percentage has remained fairly constant for several years. Sales to our largest customer across all end-use categories accounted for 12% of our sales for each of the last three fiscal years. A key factor for commercial success is inclusion on our strategic customers’ core supplier lists, which provides opportunities to win new business. We are on the core supplier lists of a large majority of our global and strategic customers within Fragrances and Flavors.
Sales in 2015 declined 2% on a reported basis but increased 5% on a currency neutral basis (which excludes the effects of changes in currency), with the effects of acquisitions contributing approximately 2% to both reported and currency neutral basis growth rates. Flavors achieved currency neutral growth of 6%, including approximately half of the growth coming from acquisitions. Fragrances achieved currency neutral growth of 4% in 2015, including approximately a quarter of the growth coming from acquisitions. The currency neutral growth of 3%, excluding acquisitions, reflects new win performance (net of losses) in both Flavors and Fragrance Compounds partially offset by volume erosion on existing business principally driven by our customers' product line rationalization and inventory management efforts. In addition, our Flavors business was negatively impacted by volume erosion in North America (NOAM) as well as weak demand and lost business in China (principally associated with facility issues). Additionally, Fragrance Ingredients sales were up 2%, which was driven entirely by the inclusion of acquisitions. Overall, our 2015 results continued to be driven by our strong emerging market presence that represented 51% of total sales and experienced 5% currency neutral growth in 2015. From a geographic perspective, all regions delivered currency neutral growth on a consolidated basis in 2015; led by Latin America (LA) with 9% currency neutral sales growth.
2015 Sales by Business Unit
Reported sales for 2015 decreased 2% year-over-year (including approximately 2% growth from acquisitions). We continue to benefit from our diverse portfolio of end-use product categories and geographies and had currency neutral sales growth in all four regions and in Consumer Fragrances and Flavor Compounds. Both Flavors and Fragrances benefited from new win performance (net of losses) and the effect of acquisitions, that were partially offset by volume erosion on existing business principally driven by our customers' product line rationalization and inventory management efforts. In addition, our Flavors business was negatively impacted by volume erosion in NOAM as well as weak demand and lost business in China (principally associated with facility issues). Exchange rate variations represented a 7% decrease in year-over-year sales. The effect of exchange rates can vary by business and region depending upon the mix of sales by country as well as the relative percentage of local sales priced in U.S. dollars versus local currencies. Currency neutral sales growth, including acquisitions, was 5% in 2015. We saw good currency neutral sales growth during each quarter of 2015, despite the impact of volume erosion on existing business. We believe that market conditions and the macro-economic environment will continue to be challenging in many markets in 2016. This lower growth environment combined with a stronger U.S. dollar and the reset of the incentive compensation program is expected to pressure our currency neutral operating profit growth and, consequently, we expect currency neutral operating profit growth in 2016 to be mid single-digits, including acquisitions.
Gross margin increased 60 basis points (bps) year-over-year. Included in 2015 was $7.9 million of acquisition-related inventory "step-up" costs and costs associated with operational improvement initiatives, compared to $7.6 million of costs related to accelerated depreciation included in Cost of goods sold and operational improvement initiatives included in 2014. Excluding these items, gross margin increased 60 bps compared to the prior year period. The increase was principally driven by productivity initiatives. We ended 2015 in a relatively benign raw material cost environment. We believe that we will continue to see higher prices on certain categories (such as naturals including citrus and vanilla) that will be offset by benefits associated with oil-based derivatives that are expected to continue in 2016. We continue to seek improvements in our margins through operational performance, cost reduction efforts and mix enhancement.
Operating profit decreased $4.0 million to $588.3 million (19.5% of sales) in 2015 compared to $592.3 million (19.2% of sales) in 2014. Included in 2015 were acquisition related costs of $18.3 million, the reversal of the previously recorded provision for the Spanish capital tax case of $10.5 million, accelerated contingent consideration payments of $7.2 million, Restructuring and other charges, net of $7.6 million and operational improvement initiative costs of $1.1 million, compared to operational improvement initiative costs of $2.5 million, Restructuring and other charges, net of $1.3 million and $5.1 million of accelerated depreciation in 2014. Excluding these charges, adjusted operating profit was $612.1 million (20.2% of sales) for 2015 versus $601.3 million (19.5% of sales) for 2014. Foreign currency changes had an unfavorable impact on operating profit of approximately 6% in 2015.
Cash flows from operations were $433.6 million or 14.3% of sales in 2015 as compared to cash flows from operations of $518.4 million, or 16.8% of sales, during 2014. The decrease in operating cash flows in 2015 as compared to 2014 is principally related to the impact of higher pension contributions, increased core working capital requirements (trade receivables, inventories and accounts payable), and increased requirements related to various operating items (including taxes, employee benefits and prepaids).
Our capital spend was $101.0 million (3.3% of sales) during 2015. Given our intent to construct a new flavors facility in China, the continuation of our Indonesia project and carryover payments from 2015, we expect that capital spending in 2016 will be approximately 5% of sales (net of potential grants and other reimbursements from government authorities).
Adjusted operating margin for the twelve months ended December 31, 2015 excludes acquisition related costs of $18.3 million, reversal of the previously recorded provision for the Spanish capital tax case of $10.5 million, accelerated contingent consideration payments of $7.2 million, Restructuring and other charges, net of $7.6 million and operational improvement initiative costs of $1.1 million. Adjusted operating margin for the twelve months ended December 31, 2014 excludes the operational improvement initiative costs of $2.5 million, Restructuring and other charges, net of $1.3 million and $5.1 million of accelerated depreciation included in Cost of goods sold related to the Fragrance Ingredients Rationalization and several locations in Asia. Adjusted operating margin for the twelve months ended December 31, 2013 excludes the operational improvement initiative costs of $2.3 million, Restructuring and other charges, net of $2.2 million, $6.7 million of accelerated depreciation included in Cost of goods sold related to the Fragrance Ingredients Rationalization and several locations in Asia, and the Spanish capital tax charge of $13.0 million.
Sales for 2015 totaled $3.0 billion, a decrease of 2% from the prior year. Excluding currency impacts, sales increased 5%. The currency neutral growth reflects new win performance (net of losses) in both Flavors and Fragrance Compounds partially offset by volume erosion on existing business principally driven by our customers' product line rationalization and inventory management efforts. In addition, our Flavors business was negatively impacted by volume erosion in North America (NOAM) as well as weak demand and lost business in China (principally associated with facility issues). On both a reported and currency neutral basis, the effect of acquisitions was approximately 2% to net sales amounts. In addition, Fragrance Ingredients sales
were up 2% on a currency neutral basis. Overall organic currency neutral growth includes 5% growth from emerging markets and 1% from developed markets.
Flavors sales in 2015 decreased 1% on a reported basis but increased 6% on a currency neutral basis versus the prior year period. Acquisitions accounted for approximately half of the net sales growth on a currency neutral basis. Overall growth was primarily due to mid single-digit growth in Beverage combined with high single-digit growth in Dairy and low single-digit growth in Savory. Regionally, the Flavors business delivered currency neutral growth across all regions, led by LA at 16% driven by double-digit gains in Beverage, Savory and Dairy. Sales growth in GA of 2% was led by low single-digit gains in Savory and Dairy, which more than offset low single-digit declines in Sweet. Sales growth in EAME of 4% was driven by mid single-digit gains in Savory and Beverage. NOAM sales growth of 11% was primarily driven by high double-digit growth in Sweet and Dairy and double-digit growth in Beverage. EAME performance continues to be led by our performance in the emerging market countries within the region. Globally, Flavors growth was led by mid single-digit growth in emerging markets. Overall, emerging markets represented approximately 52% of total Flavors sales.
Fragrances sales in 2015 declined 3% on a reported basis and increased 4% on a currency neutral basis. Acquisitions accounted for approximately one quarter of the currency neutral sales growth. Year-over-year, 2015 currency neutral sales performance was led by double-digit growth in Fabric Care, high single-digit growth in Home Care, mid single-digit growth in Hair Care and low single-digit growth in Fragrance Ingredients and Fine Fragrance. Currency neutral growth within the regions was led by EAME at 7% reflecting double-digit gains in the Fabric Care and mid single-digit growth in Fine Fragrance and Fragrance Ingredients. LA experienced currency neutral sales growth of 6% reflecting double-digit gains in Fabric Care, Home Care and Hair Care categories as well as low single-digit gains in Fragrance Ingredients, which offset mid single-digit declines in Fine Fragrance. GA had currency neutral sales growth of 3% reflecting high single-digit gains in Fragrance Ingredients and mid single-digit gains in Fabric Care. NOAM currency neutral sales declined 2% reflecting double-digit declines in Toiletries, high single-digit declines in Fragrance Ingredients and mid single-digit declines in Fine Fragrance which more than offset mid to high single-digit gains in Home Care and Fabric Care. Overall, emerging markets represented 49% of total Fragrances sales.
NOAM Flavors sales increased 11%, which included the impact of acquisitions, primarily reflects high double-digit growth in Sweet and Dairy and double-digit growth in Beverage. Total Fragrances declined 2%, reflecting double-digit declines in Toiletries, high single-digit declines in Fragrance Ingredients and mid single-digit declines in Fine Fragrance, which more than offset mid single-digit gains in Home Care and Fabric Care.
EAME Flavors currency neutral growth of 4% primarily reflects mid single-digit gains in Savory and Beverage. Total Fragrances currency neutral growth of 7% was driven by double-digit gains in the Fabric Care and mid single-digit growth in Fine Fragrance and Fragrance Ingredients, which included the impact of acquisitions.
LA Flavors currency neutral sales growth of 16% was driven by double-digit gains in Beverage, Savory and Dairy. Total Fragrances currency neutral growth of 6% reflects double-digit gains in Fabric Care, Home Care and Hair Care categories as well as low single-digit gains in Fragrance Ingredients, which offset mid single-digit declines in Fine Fragrance.
GA Flavors currency neutral sales growth of 2% was led by low single-digit gains in Savory and Dairy, which more than offset low single-digit declines in Sweet. Total Fragrances currency neutral growth of 3% primarily reflects high single-digit gains in Fragrance Ingredients and mid single-digit gains in Fabric Care.
Cost of goods sold, as a percentage of sales, decreased 60 bps, on a reported and adjusted basis, to 55.3% in 2015 compared to 55.9% in 2014 (or 55.0% and 55.6% on an adjusted basis in 2015 and 2014, respectively). Included in cost of goods sold was $7.9 million of acquisition related costs (including $6.8 million of inventory "step-up" costs) and operational improvement initiative costs in 2015 and $7.6 million of charges related to restructuring and operational improvement initiative costs in 2014.
S&A, as a percentage of sales, increased 20 bps to 16.9% versus 16.7%. The increase in S&A expenses was principally due to acquisition-related expenses which were partially offset by lower incentive compensation expense and the reversal of the previously recorded provision related to the Spanish capital tax case of $10.5 million.
During the fourth quarter of 2015, we established a series of initiatives that are expected to streamline our management structure, simplify decision-making and accountability, better leverage and align our capabilities across the organization and improve efficiency of our global manufacturing and operations network. As a result, we recorded a pre-tax charge of $7.6 million, included in restructuring and other charges, net, related to severance and related costs pertaining to approximately 150 positions that will be affected. The total cost of the plan is expected to be approximately $10 million with the remaining charges relating principally to accelerated depreciation. The Company expects to realize pre-tax savings of approximately $7-$9 million once fully implemented in the second half of 2017, half of which is expected to be realized in 2016.
In 2014, we closed our fragrance ingredients manufacturing facility in Augusta, Georgia and consolidated production into other Company facilities. In connection with this closure, we incurred charges of $13.8 million, consisting primarily of $10.3 million in accelerated depreciation of fixed assets, $2.2 million in personnel-related costs and $1.3 million in plant shutdown and other related costs. We recorded total charges of $7.4 million during 2013, consisting of $2.2 million of pre-tax charges related to severance included in Restructuring and other charges, net and $5.2 million of non-cash charges related to accelerated depreciation included in Cost of goods sold. During 2014, we recorded $1.3 million of plant shutdown and other related costs included in Restructuring and other charges, net as well as an additional $5.1 million of non-cash charges related to accelerated depreciation included in Cost of goods sold. As a result of this closure, 43 positions have been eliminated. During 2015, we recorded a net credit of $0.5 million principally related to the reversal of severance accruals.
Flavors segment profit decreased $12.8 million to $318.5 million in 2015 (22.1% of sales) from $331.3 million (22.7% of sales) in the comparable 2014 period. The decrease in segment profit and profit margin was driven by unfavorable foreign currency impacts, scale up costs of new sites in Turkey and Indonesia and other one-off costs, including incremental operating costs associated with the China Flavors facility. These costs were only partially offset by favorable volume growth, productivity initiatives, sales mix and a slight impact from the addition of Ottens Flavors.
Fragrances segment profit decreased $13.7 million to $321.8 million in 2015 (20.4% of sales), compared to $335.4 million (20.6% of sales) reported in 2014. The decrease in segment profit and profit margin was principally driven by unfavorable foreign currency impacts, which were partially offset by favorable volume growth, sales mix and a slight impact from the addition of Lucas Meyer.
Global expenses represent corporate and headquarter-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 2015, Global expenses were $28.2 million compared to $65.4 million during 2014. The decrease is principally driven by lower incentive compensation expense and the favorable impact of our cash flow hedging program.
In 2015, interest expense remained comparable with the prior year at $46.1 million. Average cost of debt was 4.5% for the 2015 period compared to 4.9% in 2014.
Other expense (income), net decreased approximately $6.0 million to $3.2 million of expense in 2015 versus $2.8 million of income in 2014. This decrease is primarily driven by lower foreign exchange gains on working capital and lower mark-to-market adjustments on deferred compensation plan assets during 2015 compared to the 2014 period.
The effective tax rate was 22.2% in 2015 as compared to 24.5% in 2014. Excluding the $2.6 million tax benefit associated with the pretax restructuring charges and operational improvement initiatives, the $6.2 million benefit associated with acquisition related costs, the $10.5 million tax settlement received in 2015 due to favorable tax rulings in Spain and another jurisdiction as well as the $2.9 million charge related to the reversal of the previously recorded provision for the Spanish capital tax case, the adjusted tax rate for 2015 was 24.2%. Excluding the $2.6 million tax benefit associated with the
pretax restructuring charges and operational improvement initiative costs as well as the $3.8 million tax benefit related to the reserve reversal for the 2001 Spanish dividend withholding tax case (as discussed in Note 10 of the Consolidated Financial Statements), the adjusted tax rate for 2014 was 25.3%. The year-over-year reduction reflects a benefit from lower cost of repatriation and loss provisions which were partially offset by mix of earnings.
Sales for 2014 totaled $3.1 billion, an increase of 5% from the prior year on both a reported and currency neutral basis, with the acquisition of Aromor adding approximately 1% to both reported and currency neutral basis amounts. The currency neutral growth reflected new win performance (net of losses) in both Flavors and Fragrance Compounds partially offset by volume erosion on existing business. In addition, Fragrance Ingredients sales were up 18% (which includes the benefit of the Aromor acquisition). Overall currency neutral growth was driven by 6% growth in emerging markets.
In 2014, Flavors sales increased 2% on a reported basis and 4% on a currency neutral basis versus 2013. The overall performance reflects new wins offset by volume erosion on existing business. Overall high single-digit growth in Beverage combined with low single-digit growth in Savory and mid single-digit growth in Dairy was partially offset by low single-digit declines in Sweet. Regionally, the Flavors business delivered currency neutral growth in LA, EAME and GA, led by LA, while sales declined in NOAM. Sales in LA were driven by high double-digit gains in Beverage. Sales in GA were led by mid single-digit gains in Savory and sales in EAME were driven by double-digit gains in Beverage. The declines in NOAM were primarily driven by low single-digit declines in Beverage and Sweet, which were only partially offset by double-digit gains in Dairy. EAME performance continues to be led by our performance in the emerging market countries within the region. Globally, Flavors growth was led by high single-digit growth in emerging markets. Overall, emerging markets represented approximately 52% of total Flavors sales.
In 2014, the Fragrances business was up 7% in both reported and currency neutral terms versus 2013. Year-over-year, 2014 currency neutral sales performance was led by double-digit growth in Fragrance Ingredients, high single-digit growth in Fabric Care and mid single-digit growth in Hair Care categories, as well as low single-digit growth in Fine Fragrances. Currency neutral growth within the regions was led by GA at 11% reflecting double-digit gains in the Fabric Care and Fragrance Ingredients. EAME experienced currency neutral sales growth of 8% reflecting double-digit gains in Fragrance Ingredients and high single-digit gains in Fabric Care. LA had currency neutral sales growth of 3% reflecting double-digit gains in Hair Care and Personal Wash. NOAM currency neutral sales increased 4% reflecting double-digit gains in Home Care and mid to high single-digit gains in Fabric Care and Hair Care categories that more than offset low single-digit declines in Fragrance Ingredients. Overall, emerging markets represented 47% of total Fragrances sales.
Currency neutral sales growth is calculated by translating prior year sales at the exchange rates for the corresponding 2014 period.
NOAM reported sales growth of 1% reflecting a decline of 1% in Flavors as double-digit growth in Dairy was more than offset by volume declines in Sweet and Beverage, and 4% growth in Fragrances. Consumer Fragrances sales
were up 8% versus last year as new wins and volume gains in Home Care and Fabric Care were only partially offset by lower volumes on existing business in Fragrance Ingredients.
EAME currency neutral growth reflects 4% growth in Flavors primarily resulting from double-digit gains in Beverages. This growth was mainly due to new wins within our emerging markets in the region, as well as volume increases. Total Fragrances growth of 8% was driven by double-digit growth in Fragrance Ingredients as well as high single-digit growth in Fabric Care.
LA currency neutral sales growth of 7% was driven by double-digit gains in Flavors, driven by Beverage. Total Fragrances growth reflects double-digit gains in Hair Care and mid single-digit gains in Fabric Care.
GA delivered currency neutral sales growth of 6%, led by mid single-digit gains in Savory. Both Consumer Fragrances and Fine Fragrances experienced high single-digit growth led by double-digit growth in Fabric Care and high single-digit growth in Fine Fragrances. In addition, GA experienced Fragrance Ingredients currency neutral sales growth of 33%.
S&A, as a percentage of sales, decreased 40 bps to 16.7% versus 17.1%. Excluding the $13.0 million Spanish capital tax charge (as discussed in Note 18 to the Consolidated Financial Statements) in 2013, adjusted S&A expenses, as a percentage of sales, were 16.7% in 2013, consistent with the current year.
In 2014, we closed our fragrance ingredients manufacturing facility in Augusta, Georgia and consolidated production into other Company facilities. In connection with this closure in 2014, we incurred charges of $13.8 million, consisting primarily of $10.3 million in accelerated depreciation of fixed assets, $2.2 million in personnel-related costs and $1.3 million in plant shutdown and other related costs. We recorded total charges of $7.4 million during 2013, consisting of $2.2 million of pre-tax charges related to severance included in Restructuring and other charges, net and $5.2 million of non-cash charges related to accelerated depreciation included in Cost of goods sold. During 2014, we recorded $1.3 million of plant shutdown and other related costs included in Restructuring and other charges, net as well as an additional $5.1 million of non-cash charges related to accelerated depreciation included in Cost of goods sold. As a result of this closure, 43 positions were eliminated.
During 2013, we reversed $1.2 million of employee-related liabilities, offset by $0.6 million of additional costs incurred related to the European Rationalization Plan announced in 2009. Additionally, during 2013, we recorded a charge of $1.7 million related to the Strategic Initiative, which began in 2011.
The effective tax rate was 24.5% in 2014 as compared to 27.1% in 2013. Excluding the $2.6 million tax benefit associated with the pretax restructuring charges and operational improvement initiative costs as well as the $3.8 million tax benefit related to the reserve reversal for the 2001 Spanish dividend withholding tax case (as discussed in Note 10 of the Consolidated Financial Statements), the adjusted tax rate for 2014 was 25.3%. Excluding the tax charge of $6.2 million related to the 2002-2003 income tax cases (as discussed in Note 10 of the Consolidated Financial Statements) and net of the $3.9 million tax benefit associated with the pretax Spanish capital tax charge (as discussed in Note 18 of the Consolidated Financial Statements), the adjusted tax rate for 2013 was 25.7%. The year-over-year reduction reflects a benefit from mix of earnings and lower loss provisions partially offset by a higher cost of repatriation.
We had cash and cash equivalents of $182.0 million at December 31, 2015 compared to $478.6 million at December 31, 2014, of which $130.1 million of the balance at December 31, 2015 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 U.S. deferred tax assets. We regularly repatriate, in the form of dividends from our non-U.S. subsidiaries, a portion of our current year earnings to fund financial obligations in the U.S. These repatriations of current year earnings totaled $184.6 million, $248.0 million and $128.0 million in 2015, 2014 and 2013, respectively.
Operating cash flows in 2015 were $433.6 million compared to $518.4 million in 2014 and $407.6 million in 2013. The decrease in operating cash flows in 2015 as compared to 2014 is principally related to the impact of higher pension contributions, increased core working capital requirements and increased requirements related to various operating items (including taxes, employee benefits and prepaids). Included in 2014 was payment of $11.2 million to the Spanish government related to a capital tax case and included in 2013 was $48 million of cash payments related to the Spanish tax cases.
Working capital (current assets less current liabilities) totaled $713.8 million at year-end 2015 compared to $1,191.2 million at December 31, 2014. This decrease in working capital of $477.4 million primarily reflects a decrease in cash balances principally resulting from the acquisitions of Ottens Flavors and Lucas Meyer during 2015 as well as higher payable balances. We 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. We estimate that, as a result of participating in the programs, there was a beneficial impact to cash inflows from operations of approximately $3.4 million, $33.1 million and $6.5 million in 2015, 2014 and 2013, respectively. The cost of participating in these programs was immaterial to our results in all periods.
Net investing activities in 2015 utilized $577.2 million compared to $221.3 million and $105.4 million in 2014 and 2013, respectively. The increase in cash paid for investing activities is primarily driven by the acquisitions of Ottens Flavors and Lucas Meyer during 2015. We acquired 100% of the outstanding shares of Ottens Flavors and Lucas Meyer for approximately $188.5 million (net of cash acquired) and $304.9 million (net of cash acquired), respectively.
Additions to property, plant and equipment were $101.0 million, $143.2 million and $134.2 million in 2015, 2014 and 2013, respectively (net of grants and other reimbursements from government authorities). These investments largely arise from our ongoing focus to align our manufacturing facilities with our customer demand, primarily in emerging markets and new technology consistent with our strategy, but also reflect approximately $6.5 million in odor-abatement equipment which was invested to address environmental issues at one of our flavors facilities in China.
In light of our intent to construct a new flavors facility in China, our relocation of our Ingredients facility in Hangzhou, China and the continuation of our Indonesia project we expect that capital spending in 2016 will be approximately 5% of sales (net of potential grants and other reimbursements from government authorities).
Net financing activities in 2015 had an outflow of $131.3 million compared to an outflow of $202.3 million and an outflow of $217.0 million in 2014 and 2013, respectively. The decrease in outflow of cash used in financing activities in 2015 as compared to 2014 principally reflects higher incremental dividend payments and treasury share repurchases in 2015 which were more than offset by proceeds from the drawdown on the revolving credit facility during 2015. The decrease in outflow of cash used in financing activities in 2014 compared to 2013 principally reflects higher incremental dividend payments and treasury share repurchases in 2014 which were more than offset by the repayment of long-term debt of $100 million made in 2013.
At December 31, 2015, we had $1,070.2 million of debt outstanding compared to $942.3 million outstanding at December 31, 2014.
We paid dividends totaling $158.9 million, $133.2 million and $87.3 million in 2015, 2014 and 2013, respectively. The cash dividend declared per share in 2015, 2014 and 2013 was $2.06, $1.72 and $1.46, respectively.
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 $237 million available under the repurchase program, approximately 2.0 million shares, or 2.5% of shares outstanding (based on the market price and shares outstanding as of December 31, 2015) could be repurchased under the program as of December 31, 2015. 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. 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.
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. Based on our leverage ratios and general market interest rate expectations, we anticipate evaluating refinancing opportunities during 2016. We believe our existing cash balances are sufficient to meet our debt service requirements.
During the third quarter of 2015, we acquired Lucas Meyer for approximately $304.9 million (net of cash acquired), which was funded from existing resources.
During the second quarter of 2015, we acquired Ottens Flavors for approximately $188.5 million (net of cash acquired), which was funded from existing resources.
We supplement short-term liquidity with access to capital markets, mainly through bank credit facilities and issuance of commercial paper. We did not issue commercial paper during 2015 and 2014.
There are two tranches under the credit facility. The Tranche A facility is available in U.S. dollars, Euros, Swiss francs, Japanese yen and British sterling in an aggregate amount up to an equivalent of $456.0 million, with a sublimit of $25.0 million for swing line borrowings. The Tranche B facility is available in Euros, Swiss francs, Japanese yen and British sterling in an aggregate amount up to an equivalent of $494.0 million. The credit facility is available for general corporate purposes. Borrowings under the credit facility bear interest at an annual rate of LIBOR plus a margin, currently 112.5 bps, linked to our credit rating. The interest rate under our credit facility at December 31, 2015 was 1.13%. The credit facility contains various affirmative and negative covenants, including the requirement for us 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 3.25 to 1. Based on this ratio, at December 31, 2015 our covenant compliance would provide overall borrowing capacity of $1,429.3 million.
As of December 31, 2015 we had $131.2 million borrowings under the credit facility. The amount which we are able to draw down on under the credit facility is limited by financial covenants as described in more detail below. Our drawdown capacity on the credit facility was $790.7 million at December 31, 2015. See Note 9 to the Consolidated Financial Statements for further information on the credit facility.
At December 31, 2015 and 2014 we were in compliance with all financial and other covenants, including the net debt to adjusted EBITDA ratio. At December 31, 2015 our Net Debt/adjusted EBITDA(1) ratio was 1.24 to 1 as defined by the credit facility, 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 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.