UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20162019
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13397
INGREDION INCORPORATED
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)
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Delaware | | 22-3514823 |
(State or | | (I.R.S. Employer |
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5 Westbrook Corporate Center, Westchester, Illinois | | 60154 |
(Address of | | (Zip Code) |
Registrant’s telephone number, including area code (708) (708) 551-2600
Securities registered pursuant to Section 12(b) of the Act:
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Title��of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
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Securities registered pursuant to Section 12(g) of the Act: NONENone
Indicate by check mark if the Registrantregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrantregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the Registrant:registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or a small reportingan emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “small reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
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Large accelerated filer | | Accelerated filer ☐ |
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Non-accelerated filer ☐ | | Smaller reporting company ☐ Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the Registrant'sregistrant's voting stock held by non-affiliates of the Registrantregistrant (based upon the per share closing price of $129.41$82.49 on the New York Stock Exchange on June 30, 2016,2019, and, for the purpose of this calculation only, the assumption that all of the Registrant'sregistrant's directors and executive officers are affiliates) was approximately $9,305,000,000.$5,477,000,000.
The number of shares outstanding of the Registrant's Common Stock,registrant's common stock, par value $.01$0.01 per share, as of February 17, 2017,1, 2020, was 71,790,000.66,881,850.
Documents Incorporated by Reference:
Information required by Part III (Items 10, 11, 12, 13 and 14) of this document is incorporated by reference to certain portions of the Registrant’sregistrant’s definitive Proxy Statement (the “Proxy Statement”) to be distributed in connection with its 20162020 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2016.2019.
INGREDION INCORPORATED
FORM 10-K
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 97 | |
Certain Relationships and Related Transactions, and Director Independence | ||
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PART I.
TheOur Company
Ingredion Incorporated (“Ingredion”) is a leading global ingredients solutions provider. We turn corn, tapioca, potatoes, grains, fruits, and other vegetables and fruits into value-added ingredients and biomaterials for the food, beverage, paper and corrugating, brewing and other industries. Ingredion was incorporated as a Delaware corporation in 1997 and its common stock is traded on the New York Stock Exchange.Exchange under the ticker symbol “INGR.”
On December 29, 2016, we completed our acquisitionFor purposes of TIC Gums Incorporated (“TIC Gums”), a privately held, U.S.-based company that provides advanced texture systemsthis report, unless the context otherwise requires, all references herein to the food“Company,” “Ingredion,” “we,” “us,” and beverage industry for $395 million, net of cash acquired. Consistent with our Strategic Blueprint for growth, this acquisition enhances our texture capabilities“our” shall mean Ingredion Incorporated and formulation expertise and provides additional opportunities for us to provide solutions for natural, organic and clean-label demands of our customers. TIC Gums utilizes a variety of agriculturally derived ingredients, such as acacia gum and guar gum, to form the foundation for innovative texture systems and allow for clean-label reformulation. TIC Gums operates two production facilities, one in Belcamp, Maryland and one in Guangzhou, China. TIC Gums also maintains an R&D lab within these two production facilities.its consolidated subsidiaries.
On March 11, 2015, we completed our acquisition of Penford Corporation (“Penford”), a manufacturer of specialty starches that was headquartered in Centennial, Colorado. The total purchase consideration for Penford was $332 million, which included the extinguishment of $93 million in debt in conjunction with the acquisition. The acquisition of Penford provides us with, among other things, an expanded specialty ingredient product portfolio consisting of potato starch-based offerings. Penford had net sales of $444 million for the fiscal year ended August 31, 2014 and operated six manufacturing facilities in the United States, all of which manufacture specialty starches.
On August 3, 2015, we completed our acquisition of Kerr Concentrates, Inc. (“Kerr”), a privately-held producer of natural fruit and vegetable concentrates for approximately $102 million in cash. Kerr serves major food and beverage companies, flavor houses and ingredient producers from its manufacturing locations in Oregon and California. The acquisition of Kerr provides us with the opportunity to expand our product portfolio.
We are principally engaged in the production and sale of starches and sweeteners for a wide range of industries, and are managed geographically on a regional basis. Our operations are classified into four reportable business segments: North America, South America, Asia PacificAsia-Pacific and Europe, Middle East, and Africa (“EMEA”). Our North America segment includes businesses in the United States, CanadaU.S., Mexico, and Mexico.Canada. Our South America segment includes businesses in Brazil, Colombia, Ecuador and the Southern Cone of South America which(which includes Argentina, Peru, Chile, Peru and Uruguay.Uruguay), Colombia, and Ecuador. Our Asia PacificAsia-Pacific segment includes businesses in South Korea, Thailand, Malaysia, China, Australia, Japan, New Zealand, Indonesia, Singapore, the Philippines, Singapore,Malaysia, India, Australia and New Zealand.Vietnam. Our EMEA segment includes businesses in Pakistan, Germany, the United Kingdom Germany,and South Africa, Pakistan and Kenya.Africa.
For purposes of this report, unless the context otherwise requires, all references herein to the “Company,” “Ingredion,” “we,” “us,” and “our” shall mean Ingredion Incorporated and its subsidiaries.
Ingredion suppliesWe supply a broad range of customers in many diverse industries around the world, including the food, beverage, paperbrewing and corrugating, brewing, pharmaceutical, textile and personal careother industries, as well as the global animal feed and corn oil markets.
Our product line includeslines include starches and sweeteners, animal feed products and edible corn oil. Our starch-based products include both food-grade and industrial starches, and biomaterials. Our sweetener products include glucose syrups, high maltose syrups, high fructose corn syrup, (“HFCS”), caramel color, dextrose, polyols, maltodextrins, and glucose and syrup solids.
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Our products are derived primarily from the processing of corn and other starch-based materials, such as tapioca, potato, and rice. We are in the process of expanding our plant-based protein product lines, including pulse-based concentrates, flours and isolates, with $185 million of investments through 2020.
Our manufacturing process is based on a capital-intensive, two-step process that involves the wet millingwet-milling and processing of starch-based materials, primarily corn. During the front-end process, corn isthe starch-based materials are steeped in a water-based solution and separated into starch and co-products such as animal feed and corn oil. The starch is then either dried for sale or further processed to make starches, sweeteners starches and other ingredients that serve the particular needs of various industries.
We believe our approach to production and service, which focuses on local management and production improvements of our worldwide operations, provides us with a unique understanding of the cultures and product requirements in each of the geographic markets in which we operate, bringing added value to our customers through innovative solutions. At the same time, we believe that our corporate functions allow us to identify synergies and maximize the benefits of our global presence.
Geographic Scope and Operations
We are principally engagedOur North America segment consists of operations in the productionU.S., Mexico, and sale of starches and sweeteners forCanada. The region’s facilities include 22 plants producing a wide range of industries,starches, sweeteners, gum acacia, and fruit and vegetable concentrates.
Our South America segment includes operations in Brazil, Colombia, the Southern Cone of South America, and Ecuador. The segment includes nine plants that produce regular, modified, waxy, and tapioca starches, high fructose and high maltose syrups and syrup solids, dextrins and maltodextrins, dextrose, specialty starches, caramel color, sorbitol, and vegetable adhesives.
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Our Asia-Pacific segment manufactures corn-based products in South Korea, China, and Australia. Also, we manufacture tapioca-based products in Thailand, from which we supply not only our Asia-Pacific segment but the rest of our global network. The region’s facilities include eight plants that produce modified, specialty, regular, waxy, tapioca and rice starches, dextrins, glucose, high maltose syrup, dextrose, high fructose corn syrup, and caramel color.
Our EMEA segment includes five plants that produce modified and specialty starches, glucose and dextrose in Pakistan, Germany, and the United Kingdom.
Additionally, we utilize a network of tolling manufacturers in various regions in the production cycle of certain specialty starches. In general, these tolling manufacturers produce certain basic starches for us, and we managein turn complete the manufacturing process of starches through our business on a geographic regional basis. Our consolidated net sales were $5.70 billion in 2016. Our operations are classified into four reportable business segments: North America, South America, Asia Pacific and EMEA (Europe, Middle East and Africa). In 2016, approximately 60 percentfinishing channels.
We utilize our global network of our net sales were derived from operations in North America, while net sales from operations in South America represented 18 percent. Net sales from operations in Asia Pacific and EMEA represented approximately 12 percent and 10 percent, respectively, of our 2016 net sales. See Note 13 of the notesmanufacturing facilities to the consolidated financial statements entitled “Segment Information” for additional financial information with respect to our reportable business segments.support key global product lines.
In general, demand for our products is balanced throughout the year. However, demand for sweeteners in South America is greater in the first and fourth quarters (its summer season) while demand for sweeteners in North America is greater in the second and third quarters. Due to the offsetting impact of these demand trends, we do not experience material seasonal fluctuations in our net sales on a consolidated basis.
Products
Our North America segment consistsportfolio of operations inproducts is generally classified into the US, Canadafollowing categories: Starch Products, Sweetener Products, and Mexico. The region’s facilities include 21 plants producingCo-products and others. Within these categories, a wide range of sweeteners, starches and fruit and vegetable concentrates.
We are the largest manufacturer of corn-based starches and sweeteners in South America, with sales in Brazil, Colombia and Ecuador and the Southern Cone of South America, which includes Argentina, Chile, Peru and Uruguay. Our South America segment includes 9 plants that produce regular, modified, waxy and tapioca starches, high fructose and high maltose syrups and syrup solids, dextrins and maltodextrins, dextrose, specialty starches, caramel color, sorbitol and vegetable adhesives.
Our Asia Pacific segment manufactures corn-based products in South Korea, Australia and China. Also, we manufacture tapioca-based products in Thailand, from which we supply not only our Asia Pacific segment but the restportion of our global network. The region’s facilities include 9 plants that produce modified,products are considered Specialty Ingredients. We describe these three general product categories in more detail below, along with a broader discussion of specialty regular, waxy, tapioca and rice starches, dextrins, glucose, high maltose syrup, dextrose, HFCS and caramel color.ingredients within the product portfolio.
Our EMEA segment includes 5 plants that produce modified and specialty starches, glucose and dextrose in England, Germany and Pakistan.
Additionally, we utilize a network of tolling manufacturers in various regions in the production cycle of certain specialty starches. In general, these tolling manufacturers produce certain basic starches for us, and we in turn complete the manufacturing process of the specialty starches through our finishing channels.
We utilize our global network of manufacturing facilities to support key global product lines.
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Products
Starch Products. Products: Our starch products represented approximately 46 percent, 4446 percent, and 4344 percent of our net sales for 2016, 20152019, 2018 and 2014,2017, respectively. Starches are an important component in a wide range of processed foods, where they are used for adhesion, clouding, dusting, expansion, fat replacement, freshness, gelling, glazing, mouth feel,mouthfeel, stabilization, and texture. Cornstarch is sold to cornstarch packers for sale to consumers. Starches are also used in paper production to create a smooth surface for printed communications and to improve strength in recycled papers. Specialty starches are used for enhanced drainage, fiber retention, oil and grease resistance, improved printability, and biochemical oxygen demand control. In the corrugating industry, starches and specialty starches are used to produce high quality adhesives for the production of shipping containers, display board and other corrugated applications. The textile industry uses starches and specialty starches for sizing (abrasion resistance) to provide size and finishes for manufactured products. Industrial starches are used in the production of construction materials, textiles, adhesives, pharmaceuticals, and cosmetics, as well as in mining, water filtration, and oil and gas drilling. Specialty starches are used for biomaterial applications including biodegradable plastics, fabric softeners and detergents, hair and skin care applications, dusting powders for surgical gloves, and in the production of glass fiber and insulation.
Sweetener Products. Products: Our sweetener products represented approximately 3736 percent, 4036 percent, and 3938 percent of our net sales for 2016, 20152019, 2018 and 2014,2017, respectively.
Glucose Syrups: Glucose Sweeteners include products such as glucose syrups, high maltose syrup, high fructose corn syrup, dextrose, polyols, maltrodextrin, glucose syrup solids, and non-GMO (genetically modified organism) syrups. Our sweeteners are fundamental ingredients widely used in a wide variety of food and beverage products, such as baked goods, snack foods, beverages, canned fruits, condiments, candy and other sweets, dairy products, ice cream, jams and jellies, prepared mixes, table syrups, soft drinks, fruit-flavored drinks, beer, and table syrups. Glucose syrupsmany others. These sweetener products also offer functionality in addition to sweetness, to processed foods. They addsuch as texture, body and viscosity; help control freezing points, crystallization, and browning; add humectancy (ability to add moisture) and flavor; and act as binders.
High Maltose Syrup: This special type of glucose syrup is primarily used as a fermentable sugar in brewing beers. High maltose syrups are also used in the production of confections, canning and some other food processing applications. Our high maltose syrups speed the fermentation process, allowing brewers to increase capacity without adding capital.
High Fructose Corn Syrup: High fructose corn syrup is used in a variety of consumer products including soft drinks, fruit-flavored beverages, baked goods, dairy products, confections and other food and beverage products. In addition to sweetness and ease of use, high fructose corn syrup provides body; humectancy; and aids in browning, freezing point and crystallization control.
Dextrose: Dextrose has a wide range of applications in the food and confection industries, in solutions for intravenous (“IV”) and other pharmaceutical applications, and numerous industrial applications like wallboard, biodegradable surface agents, and moisture control agents. Dextrose functionality in foods, beverages and confectionary includes sweetness control; body and viscosity; acting as a bulking, drying and anti-caking agent; serving as a carrier; providing freezing point and crystallization control; and aiding in fermentation. Dextrose is also a fermentation agent in the production of light beer. In pharmaceutical applications dextrose is used in IV solutions as well as an excipient suitable for direct compression in tableting.
Polyols: These products are sugar-free, reduced calorie sweeteners primarily derived from starch or sugar for the food, beverage, confectionery, industrial, personal and oral care, and nutritional supplement markets. In addition to sweetness, polyols inhibit crystallization; provide binding, humectancy and plasticity; add texture; extend shelf life; prevent moisture migration; and are an excipient suitable for tableting.
Maltodextrins and Glucose Syrup Solids: These products have a multitude of food applications, including formulations where liquid syrups cannot be used. Maltodextrins are resistant to browning, provide excellent solubility, have a low hydroscopicity (do not retain moisture), and are ideal for their carrier/bulking properties. Glucose syrup solids have a bland flavor, remain clear in solution, are easy to handle and provide bulking properties.
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Specialty Ingredients. We consider certain of our starch and sweetener products to be specialty ingredients. Specialty ingredients comprised approximately 26 percent of our net sales for 2016, up from 25 percent and 24 percent in 2015 and 2014, respectively. Our specialty ingredients are aligned with growing market and consumer trends such as health and wellness, clean-label, affordability, indulgence and sustainability. We plan to drive growth for our specialty ingredients portfolio by leveraging the following five growth platforms: Wholesome, Texture, Nutrition, Sweetness, and Biomaterial Solutions.
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Wholesome: Clean and simple specialty ingredients that consumers can identify and trust. Products include Novation clean label functional starches, value added pulse-based ingredients and gluten free offerings. Texture: Specialty ingredients that provide precise food texture solutions designed to optimize the consumer experience and build back texture. Include starch systems that replace more expensive ingredients and are designed to optimize customer formulation costs, texturizers that are designed to create rich, creamy mouth feel, and products that enhance texture in healthier offerings. Nutrition: Specialty ingredients that provide nutritional carbohydrates with benefits of digestive health and energy management. Our fibers and complementary nutritional ingredients address the leading health and wellness concerns of consumers, including digestive health, infant nutrition, weight control and energy management. Sweetness: Specialty ingredients thatsweeteners provide affordable, natural, reduced calorie and sugar-free solutions for our customers. We have a broad portfolio of nutritive
Co-products and non-nutritive sweeteners, including high potency sweeteners and naturally based stevia sweeteners. Biomaterial Solutions: Nature-based materials that help manufacturers become more sustainable by replacing synthetic materials in personal care, home care and other industrial segments.
Each growth platform addresses multiple consumer trends. To demonstrate how Ingredion is positioned to address market trends and customer needs, we present our internal growth platforms externally as “Benefit Platforms.” Connecting our capabilities to key trends and customer challenges, these Benefit Platforms include products designed to provide:
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Co-Products and others. others: Co-products and others accounted for 17 percent, 16 percent andapproximately 18 percent of our net sales for 2016, 2015each of 2019, 2018 and 2014, respectively.2017. Refined corn oil (from germ) is sold to packers of cooking oil and to producers of margarine,
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salad dressings, shortening, mayonnaise, and other foods. Corn gluten feed is sold as animal feed. Corn gluten meal is sold as high-protein feed for chickens, pet food, and aquaculture. Our other products include fruit and vegetable products, such as concentrates, purees, and essences, as well as pulse proteins and hydrocolloids systems and blends.
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our products to be specialty ingredients. Specialty ingredients comprised approximately 30 percent of our net sales for 2019, up from 29 percent and 28 percent in 2018 and 2017, respectively. These ingredients deliver more functionality than our other products and add additional customer value. Our specialty ingredients are aligned with growing market and consumer trends such as health and wellness, clean-label, simple ingredients, affordability, indulgence, and sustainability.
Competition
We drive growth for our specialty ingredients portfolio by leveraging the following five growth platforms: Starch-based Texturizers, Clean and Simple Ingredients, Sugar Reduction and Specialty Sweeteners, Food Systems, and Plant-based Proteins.
Starch-based Texturizers: Ingredients that support the structure and texture behind great eating experiences. Products are made from corn, potato, rice, tapioca and offer a multitude of textures, functionalities, and stability during processing and shelf life to a broad range of food products.
Clean and Simple Ingredients:Functional ingredients that address the clean label trend for finished products made with shorter lists of highly consumer-accepted food ingredients. From food and beverages to pet food and personal care, consumers are looking for clean, simple, natural, and authentic products that they can identify and trust. The broad portfolio of clean label ingredients includes: starches, sweeteners, flours, nutrition ingredients, emulsifiers and fruit and vegetable concentrates.
Sugar Reduction and Specialty Sweeteners: Solutions that provide sweetness and functional replacement for sugar in reduced-calorie and sugar-free foods and beverages without sacrificing quality and consistency. These specialty ingredients are made from a variety of GMO and non-GMO raw material bases and include ingredients, such as naturally based stevia sweeteners, polyols, dextrose and allulose, a rare sugar.
Food Systems: Deliver proven ingredient combinations to accelerate product development enabling customers to get to market faster. A Food System can address a world of functional challenges, including: mouthfeel/texture for dairy and alternative dairy products, thickening of sauces, stabilization in high-protein drinks, gelling for fruit fillings, film formers for candy shells, foaming and frothing, adding soluble fibers and nutritional ingredients, adhering particles to breads and emulsification of flavors.
Plant-based Proteins: Specialty pulse-based protein ingredients that bring solutions to the world made from lentils, chickpeas, fava beans and peas. They add protein, dietary fiber, micronutrients and texture to food and beverages.
Competition
The starch and sweetener industry is highly competitive. Many of our products are viewed as basic ingredients that compete with virtually identical products and derivatives manufactured by other companies in the industry. The USU.S. is a highly competitive market where there arewith operations by other starch processors, several of which are divisions of larger enterprises. Some of these competitors, unlike us, have vertically integrated their starch processing and other operations. Competitors include ADM Corn Processing Division (“ADM”) (aADM,” a division of Archer-Daniels-Midland Company), Cargill, Inc. (“Cargill”), Tate & Lyle Ingredients Americas, Inc. (“Tate & Lyle”), and several others. Our operations in Mexico and Canada face competition from USU.S. imports and local producers including ALMEX, a Mexican joint venture between ADM and Tate & Lyle Ingredients Americas, Inc.Lyle. In South America, Cargill has starch processing operations in Brazil and Argentina. We also face competition from Roquette Frères S.A. (“Roquette”) primarily in our North America region.
Many smaller local corn and tapioca refiners also operate in many of our markets. Competition within our markets is largely based on price, quality, and product availability.
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Several of our products also compete with products made from raw materials other than corn. HFCSHigh fructose corn syrup and monohydrate dextrose compete principally with cane and beet sugar products. Co-products such as corn oil and gluten meal compete with products of the corn dry milling industry and with soybean oil, soybean meal, and other products. Fluctuations in prices of these competing products may affect prices of, and profits derived from, our products.
Customers
We supply a broad range of customers in over 60 industries worldwide. The following table provides the approximate percentage of total net sales by industry for each of our segments for 2016:industries served in 2019:
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Industries Served |
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| Pacific |
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Food |
| 52 | % | 50 | % | 46 | % | 65 | % | 58 | % | | 54 | % | 50 | % | 47 | % | 66 | % | 69 | % |
Beverage |
| 11 | % | 14 | % | 8 | % | 8 | % | 1 | % | | 10 | | 14 | | 7 | | 6 | | 1 | |
Brewing | | 8 | | 8 | | 16 | | 3 | | — | | |||||||||||
Food and Beverage Ingredients | | 72 | | 72 | | 70 | | 75 | | 70 | | |||||||||||
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Animal Nutrition |
| 10 | % | 10 | % | 16 | % | 6 | % | 8 | % | | 9 | | 10 | | 14 | | 5 | | 8 | |
Paper and Corrugating |
| 11 | % | 12 | % | 8 | % | 14 | % | 4 | % | |||||||||||
Brewing |
| 8 | % | 8 | % | 15 | % | 3 | % | — | % | |||||||||||
Other |
| 8 | % | 6 | % | 7 | % | 4 | % | 29 | % | | 19 | | 18 | | 16 | | 20 | | 22 | |
Total |
| 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||
Total Net sales | | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||
No customer accounted for 10 percent or more of our net sales in 2016, 20152019, 2018, or 2014.2017.
Raw Materials
Corn (primarily yellow dent) is the primary basic raw material we use to produce starches and sweeteners. The supply of corn in the United StatesU.S. has been, and is anticipated to continue to be, adequate for our domestic needs. The price of corn, which is determined by reference to prices on the Chicago Board of Trade, fluctuates as a result of various factors including: farmers’ planting decisions, climate, domestic and foreign government policies (including those related to the production of ethanol), livestock feeding, shortages or surpluses of world grain supplies, and domestic and foreign government policies and trade agreements. We use starch from potato processors as the primary raw material to manufacture ingredients derived from potato-based starches. We also use tapioca, gum, rice, gum and sugar as raw material.materials.
Corn is also grown in other areas of the world, including Canada,China, Brazil, Europe, Argentina, Mexico, Europe, South Africa, Argentina, Australia, Brazil, ChinaCanada, Pakistan, and Pakistan.Australia. Our affiliatessubsidiaries outside the United StatesU.S. utilize both local supplies of corn and corn imported from other geographic areas, including the United States.U.S. The supply of corn for these affiliatessubsidiaries is also generally expected to be adequate for our needs. Corn prices for our non-USnon-U.S. affiliates generally fluctuate as a result of the same factors that affect USU.S. corn prices.
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We also utilize specialty grains such as waxy and high amylose corn in our operations. In general, the planning cycle for our specialty grain sourcing begins three years in advance of the anticipated delivery of the specialty corn since the necessary seed must be grown in the season prior to grain contracting. In order to secure these specialty grains at the time of our anticipated needs, we contract with certain farmers to grow the specialty corn approximately two years in advance of delivery. These specialty grains arehave a higher cost due to their more limited supply and require longer planning cycles to mitigate the risk of supply shortages.
Due to the competitive nature of our industry and the availability of substitute products not produced from corn, such as sugar from cane or beets, end productend-product prices may not necessarily fluctuate in a manner that correlates to raw material costs of corn.
We follow a policy of hedging our exposure to commodity price fluctuations with commodities futures and options contracts primarily for certain of our North American corn purchases. We use derivative hedging contracts to protect the gross margin of our firm-priced business in North America. Other business may or may not be hedged at any given time based on management’s judgment as to the need to fix the costs of our raw materials to protect our profitability.
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Outside of North America, we generally enter into short-term commercial sales contracts and adjust our selling prices based upon the local raw material costs. See Item 7A,7A. Quantitative and Qualitative Disclosures about Market Risk, in the section entitled “Commodity Costs” for additional information.
Other raw materials used in our manufacturing processes include starch from potato processors as the primary raw material to manufacture ingredients derived from potato-based starches. In addition, we use tapioca, particularly in certain of our production processes in the Asia-Pacific region. While the price of tapioca fluctuates from time-to-time as a result of growing conditions, the supply of tapioca has been, and is anticipated to continue to be, adequate for our production needs in the various markets in which we operate. In addition to corn, potato, and tapioca, we use pulses, gum, rice, and sugar as raw materials, among others.
Research and Development
We have a global network of more than 350400 scientists working in 2730 Ingredion Idea Labs™Labs® innovation centers with headquarters in Bridgewater, New Jersey. Activities at Bridgewater include plant science and physical, chemical and biochemical modifications to food formulations, food sensory evaluation, as well asand development of non-food applications such as starch-based biopolymers. In 2013, we expanded our Bridgewater facility with the addition of a lab and sensory evaluation space dedicated to our sweeteners portfolio. In addition, we have product application technology centers that direct our product development teams worldwide to create product application solutions to better serve the ingredient needs of our customers. Product development activity is focused on developing product applications for identified customer and market needs. Through this approach, we have developed value-added products for use by customers in various industries. We usually collaborate with customers to develop the desired product application either in the customers’ facilities, our technical service laboratories, or on a contract basis. These efforts are supported by our marketing, product technology, and technology support staff. Research and developmentR&D expense was approximately $41$44 million in 2016,2019, $46 million in 2018, and $43 million in 20152017. Our R&D expense represents investment in new product development and $37 million in 2014.innovation. Our R&D is further supplemented by technical support services to assist our customers with application development and co-creation.
Sales and Distribution
Our salaried sales personnel, who are generally dedicated to customers in a geographic region, sell our products directly to manufacturers and distributors. In addition, we have staff that provide technical support to our sales personnel on an industry basis. We generally contract with trucking companies to deliver our bulk products to customer destinations. In North America, we generally use trucks to ship to nearby customers. For those customers located considerable distances from our plants, we use either rail or a combination of railcars and trucks to deliver our products. We generally lease railcars for terms of three to ten years.
Patents, Trademarks, and Technical License Agreements
We own more than 850750 patents and patents pending, which relate to a variety of products and processes, and a number of established trademarks under which we market our products. We also have the right to use other patents and trademarks pursuant to patent and trademark licenses. We do not believe that any individual patent or trademark is material to our business. There is no currently pending challenge to the use or registration of any of our significant patents or trademarks that would have a material adverse impact on us or our results of operations if decided against us.
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Employees
Employees
As of December 31, 20162019, we had approximately 11,000 employees, of whichwhom approximately 2,600 were located in the United States.U.S. Approximately 31 percent of USour U.S. employees and 3936 percent of our non-USnon-U.S. employees are unionized.
Government Regulation and Environmental Matters
As a manufacturer and marketer of food items and items for use in the pharmaceutical industry, our operations and the use of many of our products are subject to various federal, state, foreign and local statutes and regulations, including the Federal Food, Drug and Cosmetic Act and the Occupational Safety and Health Act. We and many of our products are also subject to regulation by various government agencies, including the United StatesU.S. Food and Drug Administration. Among
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other things, applicable regulations prescribe requirements and establish standards for product quality, purity, and labeling. Failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines. No such fines of a material nature were imposed on us in 2016.2019. We may also be required to comply with federal, state, foreign, and local laws regulating food handling and storage. We believe these laws and regulations have not negatively affected our competitive position.
Our operations are also subject to various federal, state, foreign, and local laws and regulations with respect to environmental matters, including air and water quality, and underground fuel storage tanks, and other regulations intended to protect public health and the environment. We operate industrial boilers that fire natural gas, coal, or biofuels to operate our manufacturing facilities and they, along with product dryers, are our primary source of greenhouse gas emissions. In Argentina, we are in discussions with local regulators associated with conductingaddressing our possible undertaking to conduct studies of possible environmental remediation programs at our Chacabuco plant. We are unable to predict the outcome of these discussions; however, wediscussions, but do not believe that the ultimate cost of remediation will be material. Based on current laws and regulations and the enforcement and interpretations thereof, we do not expect that the costs of future environmental compliance will be a material expense, although there can be no assurance that we will remain in compliance or that the costs of remaining in compliance will not have a material adverse effect on our future financial condition and results of operations.
During 2016,2019, we spent approximately $11$12 million for environmental control and wastewater treatment equipment to be incorporated into existing facilities and in planned construction projects. We currently anticipate that we will spendinvest approximately $21 million and $14$10 million for environmental facilities and programs in 2017each of 2020 and 2018, respectively.2021.
Other
Our Internet address is www.ingredion.com. We make available, free of charge through our Internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are made available as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. Our corporate governance guidelines, board committee charters and code of ethics are posted on our website, the address of which is www.ingredion.com, and each is available in print to any shareholder upon request in writing to Ingredion Incorporated, 5 Westbrook Corporate Center, Westchester, Illinois 60154, Attention: Corporate Secretary. The contents of our website are not incorporated by reference into this report.
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Information about our Executive Officers of the Registrant
Set forth below, as of January 31, 2020, are the names and ages of all of our executive officers, indicating their positions and offices with the Company and other business experience. Our executive officers are elected annually by the Board to serve until the next annual election of officers and until their respective successors have been elected and have qualified, unless removedor until their earlier resignation or removal by the Board.
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Jorgen Kokke | | 51 | | Executive Vice President, Global Specialties, and President, North America since February 5, 2018. Prior to assuming his current position, Mr. Kokke previously served as Senior Vice President and President, Asia-Pacific and EMEA | ||
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Stephen K. Latreille | | 53 | | Vice President and Corporate Controller since April 1, 2016. Prior to |
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Robert J. Stefansic | | 58 | | Senior Vice President, Operating Excellence, Information Technology and Chief Supply Chain Officer since September 17, 2018. Prior to assuming his current position, he served as Senior Vice President, Operating Excellence, Sustainability, Information Technology and Chief Supply Chain Officer since March 1, 2017, and as Senior Vice President, Operational Excellence, Sustainability and Chief Supply Chain Officer | ||
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ITEM 1A. RISK FACTORS
Our business and assets are subject to varying degrees of risk and uncertainty. The following are factors that we believe could cause our actual results to differ materially from expected and historical results. Additional risks that are currently unknown to us may also impair our business or adversely affect our financial condition or results of operations. In addition, forward-looking statements within the meaning of the federal securities laws that are contained in this Form 10-K or in our other filings or statements may be subject to the risks described below as well as other risks and uncertainties. Please readSee the cautionary notice regarding forward-looking statements in Item 7 below.7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Current economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers and others with whom we do business to suffer financial hardship, all of which could adversely impact our business, results of operations, financial condition and cash flows.
Economic conditions in South America, the European Union and many other countries and regions in which we do business have experienced various levels of weakness over the last few years, and may remain challenging for the foreseeable future. General business and economic conditions that could affect us include the strength of the economies in which we operate, unemployment, inflation and fluctuations in debt markets. While currently these conditions have not impaired our ability to access credit markets and finance our operations, there can be no assurance that there will not be a further deterioration in the financial markets.
There could be a number of other effects from these economic developments on our business, including reduced consumer demand for products; pressure to extend our customers’ payment terms; insolvency of our customers, resulting in increased provisions for credit losses; decreased customer demand, including order delays or cancellations; and counterparty failures negatively impacting our operations.
In connection with our defined benefit pension plans, adverse changes in investment returns earned on pension assets and discount rates used to calculate pension and related liabilities or changes in required pension funding levels may have an unfavorable impact on future pension expense and cash flow.
In addition, the volatile worldwide economic conditions and market instability may make it difficult for us, our customers and our suppliers to accurately forecast future product demand trends, which could cause us to produce excess products that could increase our inventory carrying costs. Alternatively, this forecasting difficulty could cause a shortage of products that could result in an inability to satisfy demand for our products.
We operate a multinational business subject to the economic, political and other risks inherent in operating in foreign countries and with foreign currencies.
We have operated in foreign countries and with foreign currencies for many years. Our results are subject to foreign currency exchange fluctuations. Our operations are subject to political, economic and other risks. There has been and continues to be significant political uncertainty in some countries in which we operate. Economic changes, terrorist activity and political unrest may result in business interruption or decreased demand for our products. Protectionist trade measures and import and export licensing requirements could also adversely affect our results of operations. Our success will depend in part on our ability to manage continued global political and/or economic uncertainty.
We primarily sell products derived from world commodities. Historically, we have been able to adjust local prices relatively quickly to offset the effect of local currency devaluations, although we cannot guarantee our ability to do this in the future. For example, due to pricing controls on many consumer products imposed in the recent past by the Argentina government, it took longer than it had previously taken to achieve pricing improvement in response to currency devaluations in that country. The anticipated strength in the US dollar may continue to provide some challenges as it could take an extended period of time to fully recapture the impact of foreign currency devaluations, particularly in South America.
We may hedge transactions that are denominated in a currency other than the currency of the operating unit entering into the underlying transaction. We are subject to the risks normally attendant to such hedging activities.
Raw material and energy price fluctuations, and supply interruptions and shortages could adversely affect our results of operations.
Our finished products are made primarily from corn. Purchased corn and other raw material costs account for between 40 percent and 65 percent of finished product costs. Some of our products are based upon specific varieties of corn that are produced in significantly less volumes than yellow dent corn. These specialty grains are higher-cost due to their more limited supply and require planning cycles of up to three years in order for us to receive our desired amount
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of specialty corn. We also manufacture certain starch-based products from potatoes. Our current potato starch requirements constitute a material portion of the available North American supply. It is possible that, in the long term, continued growth in demand for potato starch-based ingredients and new product development could result in capacity constraints. Also, we utilize tapioca in the manufacturing of starch products primarily in Thailand. With our acquisition of TIC Gums, we now sell products made from acacia gum, approximately half of which we purchase in the Sudan. If our raw materials are not available in sufficient quantities or quality, our results of operations could be negatively impacted.
Energy costs represent approximately 10 percent of our finished product costs. We use energy primarily to create steam in production processes and to dry products. We consume coal, natural gas, electricity, wood and fuel oil to generate energy. In Pakistan, the overall economy has been slowed by severe energy shortages which both negatively impact our ability to produce sweeteners and starches, and also negatively impact the demand from our customers due to their inability to produce their end products because of the shortage of reliable energy.
The market prices for our raw materials may vary considerably depending on supply and demand, world economies and other factors. We purchase these commodities based on our anticipated usage and future outlook for these costs. We cannot assure that we will be able to purchase these commodities at prices that we can adequately pass on to customers to sustain or increase profitability.
In North America, we sell a large portion of our finished products derived from corn at firm prices established in supply contracts typically lasting for periods of up to one year. In order to minimize the effect of volatility in the cost of corn related to these firm-priced supply contracts, we enter into corn futures and options contracts, or take other hedging positions in the corn futures market. Additionally, we produce and sell ethanol and enter into swap contracts to hedge price risk associated with fluctuations in market prices of ethanol. We are unable to directly hedge price risk related to co-product sales; however, we occasionally enter into hedges of soybean oil (a competing product to our animal feed and corn oil) in order to mitigate the price risk of animal feed and corn oil sales. These derivative contracts typically mature within one year. At expiration, we settle the derivative contracts at a net amount equal to the difference between the then-current price of the commodity (corn, soybean oil or ethanol) and the derivative contract price. These hedging instruments are subject to fluctuations in value; however, changes in the value of the underlying exposures we are hedging generally offset such fluctuations. The fluctuations in the fair value of these hedging instruments may affect our cash flow. We fund any unrealized losses or receive cash for any unrealized gains on futures contracts on a daily basis. While the corn futures contracts or hedging positions are intended to minimize the effect of volatility of corn costs on operating profits, the hedging activity can result in losses, some of which may be material. Outside of North America, sales of finished products under long-term, firm-priced supply contracts are not material. We also use over-the-counter natural gas swaps to hedge portions of our natural gas costs, primarily in our North American operations.
Due to market volatility, we cannot assure that we can adequately pass potential increases in the cost of corn and other raw materials on to customers through product price increases or purchase quantities of corn and other raw materials at prices sufficient to sustain or increase our profitability.
The price and availability of corn and other raw materials is influenced by economic and industry conditions, including supply and demand factors such as crop disease and severe weather conditions such as drought, floods or frost that are difficult to anticipate and which we cannot control.
Our profitability may be affected by other factors beyond our control.
Our operating income and ability to increase profitability depend to a large extent upon our ability to price finished products at a level that will cover manufacturing and raw material costs and provide an acceptable profit margin. Our ability to maintain appropriate price levels is determined by a number of factors largely beyond our control, such as aggregate industry supply and market demand, which may vary from time to time, and the economic conditions of the geographic regions in which we conduct our operations.
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We operate in a highly competitive environment and it may be difficult to preserve operating margins and maintain market share.
We operate in a highly competitive environment. Many of our products compete with virtually identical or similar products manufactured by other companies in the starch and sweetener industry. In the United States, there are competitors, several of which are divisions of larger enterprises that have greater financial resources than we do. Some of these competitors, unlike us, have vertically integrated their corn refining and other operations. Many of our products also compete with products made from raw materials other than corn, including cane and beet sugar. Fluctuation in prices of these competing products may affect prices of, and profits derived from, our products. In addition, government programs supporting sugar prices indirectly impact the price of corn sweeteners, especially HFCS. Competition in markets in which we compete is largely based on price, quality and product availability.
Changes in consumer preferences and perceptions may lessen the demand for our products, which could reduce our sales and profitability and harm our business.
Food products are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends. For instance, changes in prevailing health or dietary preferences causing consumers to avoid food products containing sweetener products, including HFCS,high fructose corn syrup, in favor of foods that are perceived as being more healthy, could reduce our sales and profitability, and such reductions could be material. Increasing concern among consumers, public health professionals and government agencies about the potential health concerns associated with obesity and inactive lifestyles (reflected, for instance, in taxes designed to combat obesity, which have been imposed recently in North America) represent a significant challenge to some of our customers, including those engaged in the food and soft drink industries.
Current economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers and others with whom we do business to suffer financial hardship, all of which could adversely impact our business, results of operations, financial condition, and cash flows.
Economic conditions in South America, the European Union, and many other countries and regions in which we do business have experienced various levels of weakness over the last few years, and may remain challenging for the foreseeable future. General business and economic conditions that could affect us include barriers to trade (including as a result of Brexit, tariffs, duties, and border taxes, among other factors), the strength of the economies in which we operate, unemployment, inflation, and fluctuations in debt markets. While currently these conditions have not impaired our ability to access credit markets and finance our operations, there can be no assurance that there will not be a further deterioration in the financial markets.
There could be a number of other effects from these economic developments on our business, including reduced consumer demand for products, pressure to extend our customers’ payment terms, insolvency of our customers resulting in increased provisions for credit losses, decreased customer demand, including order delays or cancellations, and counterparty failures negatively impacting our operations.
In connection with our defined benefit pension plans, adverse changes in investment returns earned on pension assets and discount rates used to calculate pension and related liabilities or changes in required pension funding levels may have an unfavorable impact on future pension expenses and cash flows.
In addition, volatile worldwide economic conditions and market instability may make it difficult for us, our customers, and our suppliers to accurately forecast future product demand trends, which could cause us to produce excess products that could increase our inventory carrying costs. Alternatively, this forecasting difficulty could cause a shortage of products that could result in an inability to satisfy demand for our products.
Our reliance on certain industries for a significant portion of our sales could have a material adverse effect on our business.
Approximately 54 percent of our 2019 sales were made to companies engaged in the food industry and approximately 10 percent were made to companies in the beverage industry. Additionally, sales to the animal nutrition and brewing industry represented approximately 9 percent and approximately 8
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percent, respectively, of our 2019 net sales. If our food customers, beverage customers, animal feed customers, or brewing industry customers were to substantially decrease their purchases, our business might be materially adversely affected.
The uncertainty of acceptance of products developed through biotechnology could affect our profitability.
The commercial success of agricultural products developed through biotechnology, including genetically modified corn, depends in part on public acceptance of their development, cultivation, distribution and consumption. Public attitudes can be influenced by claims that genetically modified products are unsafe for consumption or that they pose unknown risks to the environment, even if such claims are not based on scientific studies. These public attitudes can influence regulatory and legislative decisions about biotechnology. The sale of the Company’sour products, which may contain genetically modified corn, could be delayed or impairedimpeded because of adverse public perception regarding the safety of the Company’sour products and the potential effects of these products on animals, human health, the environment, and the environment.animals.
Our information technology systems, processes, and sites may suffer interruptions or failures which may affect our ability to conduct our business.
Our information technology systems, which are dependent on services provided by third parties, provide critical data connectivity, information and services for internal and external users. These interactions include, but are not limited to, ordering and managing materials from suppliers, converting raw materials to finished products, inventory management, shipping products to customers, processing transactions, summarizing and reporting results of operations, human resources benefits and payroll management, complying with regulatory, legal or tax requirements, and other processes necessary to manage our business. We have put in place security measures to protect ourselves against cyber-based attacks and disaster recovery plans for our critical systems. However, if our information technology systems are breached, damaged, or cease to function properly due to any number of causes, such as catastrophic events, power outages, security breaches, or cyber-based attacks, and our disaster recovery plans do not effectively mitigate on a timely basis, we may encounter disruptions that could interrupt our ability to manage our operations and suffer damage to our reputation, which may adversely impact our revenues, operating results and financial condition.
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Our future growth could be negatively impacted if we fail to introduce sufficient new products and services.
While we do not believe that any individual patent or trademark is material to our business, a portion of our growth comes from innovation in products, processes, and services. We cannot guarantee that our research and development efforts will result in new products and services at a rate or of a quality sufficient to meet expectations.
Our profitability could be negatively impacted if we fail to maintain satisfactory labor relations.
Approximately 31 percent of our US and 39 percent of our non-US employees are members of unions. Strikes, lockouts or other work stoppages or slowdowns involving our unionized employees could have a material adverse effect on us.
Our reliance on certain industries for a significant portion of our sales could have a material adverse effect on our business.
Approximately 52 percent of our 2016 sales were made to companies engaged in the food industry and approximately 11 percent each were made to companies in the beverage industry and companies in the paper and corrugating industry. Additionally, sales to the animal nutrition markets and the brewing industry represented approximately 10 percent and 8 percent of our 2016 net sales, respectively. If our food customers, beverage customers, brewing industry customers, paper and corrugating customers or animal feed customers were to substantially decrease their purchases, our business might be materially adversely affected.
Natural disasters, war, acts and threats of terrorism, pandemic and other significant events could negatively impact our business.
If the economies of any countries in which we sell or manufacture products or purchase raw materials are affected by natural disasters; such as earthquakes, floods or severe weather; war, acts of war or terrorism; or the outbreak of a pandemic; it could result in asset write-offs, decreased sales and overall reduced cash flows.
Government policies and regulations could adversely affect our operating results.
Our operating results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, and other activities of United Statesthe U.S. and foreign governments, agencies, and similar organizations. These conditions include but are not limited to changes in a country’s or region’s economic or political conditions, modification or termination of trade agreements or treaties promoting free trade, creation of new trade agreements or treaties, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights, changes in the regulatory or legal environment, restrictions on currency exchange activities, currency exchange rate fluctuations, burdensome taxes and tariffs, and other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities, and war, could limit our ability to transact business in these markets and could adversely affect our revenues and operating results.
Due to cross-border disputes, ourOur operations could be adversely affected by actions taken in connection with cross-border disputes by the governments of countries in which we conduct business.
FutureWe operate in a highly competitive environment and it may be difficult to preserve operating margins and maintain market share.
We operate in a highly competitive environment. Competition in markets in which we compete is largely based on price, quality, and product availability. Many of our products compete with virtually identical or similar products manufactured by other companies in the starch and sweetener industry. In the U.S., our competitors include divisions of larger enterprises that have greater financial resources than we do. Some of these competitors, unlike us, have vertically integrated their corn refining and other operations. Many of our products also compete with products made from raw materials other than corn, including cane and beet sugar. Fluctuation in prices of these competing products may affect prices of, and profits derived from, our products. In addition, government programs supporting sugar prices indirectly impact the price of corn sweeteners, especially high fructose corn syrup. Furthermore, co-products such as corn oil and gluten meal compete with products of the corn dry milling industry and with soybean oil, soybean meal, and other products, the price of some of which may be affected by government programs such as tariffs or quotas.
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Due to market volatility, we cannot assure that we can adequately pass potential increases in the cost of corn and other raw materials on to customers through product price increases or purchase quantities of corn and other raw materials at prices sufficient to sustain or increase our profitability.
The price and availability of corn and other raw materials is influenced by economic and industry conditions, including supply and demand factors such as crop disease and severe weather conditions, such as drought, floods, or frost, that are difficult to anticipate and which we cannot control.
Raw material and energy price fluctuations, and supply interruptions and shortages could adversely affect our results of operations.
Our finished products are made primarily from corn. Purchased corn and other raw material costs account for between 40 percent and 65 percent of finished product costs. Some of our products are based upon specific varieties of corn that are produced in significantly less volumes than yellow dent corn. These specialty grains are higher-cost due to their more limited supply and require planning cycles of up to three years in order for us to receive our desired amounts of specialty corn. We also manufacture certain starch-based products from potatoes. Our current potato starch requirements constitute a material portion of the total available North American supply. It is possible that, in the long term, continued growth in demand for potato starch-based ingredients and new product development could result in capacity constraints. Also, we utilize tapioca in the manufacturing of starch products primarily in Thailand, as well as pulses, gum, rice and other raw materials around the world. A significant supply disruption or sharp increase in any of these raw material prices that we are unable to recover through pricing increases to our customers could have an adverse impact on our growth and profitability.
Energy costs represent approximately 9 percent of our finished product costs. We use energy primarily to create steam required for our production processes and to dry products. We consume coal, natural gas, electricity, wood, and fuel oil to generate energy.
The market prices for our raw materials may vary considerably depending on supply and demand, world economies, trade agreements and tariffs, and other factors. We purchase these commodities based on our anticipated usage and future outlook for these costs. We cannot assure that we will be able to purchase these commodities at prices that we can adequately pass on to customers to sustain or increase profitability.
In North America, we sell a large portion of our finished products derived from corn at firm prices established in supply contracts typically lasting for periods of up to one year. In order to minimize the effect of volatility in the cost of corn related to these firm-priced supply contracts, we enter into corn futures and options contracts, or take other hedging positions in the corn futures market. These derivative contracts typically mature within one year. At expiration, we settle the derivative contracts at a net amount equal to the difference between the then-current price of the commodity and the derivative contract price. The fluctuations in the fair value of these hedging instruments may adversely affect our cash flow. We fund any unrealized losses or receive cash for any unrealized gains on futures contracts on a daily basis. While the corn futures contracts or hedging positions are intended to minimize the effect of volatility of corn costs on operating profits, the hedging activity can result in losses, some of which may be material.
An inability to contain costs could adversely affect our future profitability and growth.
Our future profitability and growth depends on our ability to contain operating costs and per unit product costs and to maintain and implement effective cost control programs, while at the same time maintaining competitive pricing and superior quality products, customer service, and support. Our ability to maintain a competitive cost structure depends on continued containment of manufacturing, delivery, freight, and administrative costs, as well as the implementation of cost-effective purchasing programs for raw materials, energy, and related manufacturing requirements.
If we are unable to contain our operating costs and maintain the productivity and reliability of our production facilities, our profitability and growth could be adversely affected.
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Increased interest rates could increase our borrowing costs.
We may issue debt securities to finance acquisitions, capital expenditures, and working capital, or for other general corporate purposes. An increase in interest rates in the general economy could result in an increase in our borrowing costs for these financings, as well as under any existing debt that bears interest at an unhedged floating rate.
Climate change and future costs of environmental compliance may be material.
Our business could be affected in the future by national and global regulation or taxation of greenhouse gas emissions. Inemissions, as well as the United States,potential effects of climate change. Changes in precipitation extremes, droughts and water availability have the US Environmental Protection Agency (“EPA”) has adopted regulations requiringpotential to impact Ingredion's agricultural supply as well as the owners and operatorsavailability of certain facilities to measure and report their greenhouse gas emission. The US EPA has also begun to regulate greenhouse gas emissions from certain stationary and mobile sources under the Clean Air Act. For example, the US EPA has proposed rules regarding the construction and operation of coal-fired boilers. California and Ontario are also moving forward with various programs to reduce greenhouse gases.water for our manufacturing operations. Globally, a number of countries
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that are parties to the Kyoto Protocol have instituted or are considering climate change legislation and regulations. Most notable isIngredion continues to assess the European Union Greenhouse Gas Emission Trading System.impact of climate change, regulatory pressures and changing consumer behaviors on our business strategy. It is difficult at this time to estimate the likelihood of passage or predict the potential impact of any additional legislation. Potential consequences could include increased energy, transportation, and raw materials costs, and we may require the Companybe required to make additional investments in itsour facilities and equipment.
The recognition of impairment chargesWe may not successfully identify and complete acquisitions or strategic alliances on goodwillfavorable terms or long-lived assetsachieve anticipated synergies relating to any acquisitions or alliances, and such acquisitions could adversely impact our future financial positionresult in unforeseen operating difficulties and results of operations.expenditures and require significant management resources.
We have $1.3 billionregularly review potential acquisitions of total intangible assetscomplementary businesses, technologies, services, or products, as well as potential strategic alliances. We may be unable to find suitable acquisition candidates or appropriate partners with which to form partnerships or strategic alliances. Even if we identify appropriate acquisition or alliance candidates, we may be unable to complete such acquisitions or alliances on favorable terms, if at December 31, 2016, consistingall. In addition, the process of $784 millionintegrating an acquired business, technology, service, or product into our existing business and operations may result in unforeseen operating difficulties and expenditures. Integration of goodwill and $502 million of other intangible assets. Additionally, we have $2.2 billion of long-lived assets at December 31, 2016.
We perform an annual impairment assessmentacquired company also may require significant management resources that otherwise would be available for goodwill and our indefinite-lived intangible assets, and as necessary, for other long-lived assets. If the results of such assessments were to show that the fair value of these assets were less than the carrying values, we could be required to recognize a charge for impairment of goodwill and/or long-lived assets and the amount of the impairment charge could be material. Based on the results of the annual assessment, we concluded that as of October 1, 2016, it was more likely than not that the fair value of allongoing development of our reporting units was greater than their carrying value and no additional impairment charges were necessary (althoughbusiness. Moreover, we may not realize the $26 millionanticipated benefits of goodwill at our Brazil reporting unit continues to be closely monitored due to recent trends and increased volatility experienced in this reporting unit, such as continued slow economic growth, heightened competition and possible future negative economic growth). Additionally, significant risk and uncertainty exists around certain manufacturing assets in Argentina and Brazil that we are closely monitoring due to increased volatility experienced due to continued slow economic growth, heightened competition, and possible future negative economic growth.
Even though it was determined that there was no additional long-lived asset impairment as of October 1, 2016, the future occurrence of a potential indicator of impairment, such as a significant adverse change in the business climate that would require a change in our assumptionsany acquisition or strategic decisions made in response to economic or competitive conditions,alliance, and such transactions may not generate anticipated financial results. Future acquisitions could also require us to perform an assessment priorissue equity securities, incur debt, assume contingent liabilities, or amortize expenses related to the next required assessment dateintangible assets, any of October 1, 2017.which could harm our business.
Changes in our tax rates or exposure to additional income tax liabilities could impact our profitability.
We are subject to income taxes in the United States and in various other foreign jurisdictions. Our effective tax rates could be adversely affected by changes in the mix of earnings by jurisdiction, changes in tax laws or tax rates, including potential tax reform in the US to broaden the tax base, change the tax rate or alter the taxation of offshore earnings, changes in the valuation of deferred tax assets and liabilities and material adjustments from tax audits.
Significant changes in the tax laws of the US and numerous foreign jurisdictions in which we do business could result from the base erosion and profit shifting (BEPS) project undertaken by the Organization for Economic Cooperation and Development (OECD). An OECD-led coalition of 44 countries is contemplating changes to long-standing international tax norms that determine each country’s right to tax cross-border transactions. These contemplated changes, if finalized and adopted by countries, would increase tax uncertainty and the risk of double taxation, thereby adversely affecting our provision for income taxes.
The recoverability of our deferred tax assets, which are predominantly in Brazil, Canada, Germany, Mexico and the US, is dependent upon our ability to generate future taxable income in these jurisdictions. In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions and a material assessment by a governing tax authority could affect our profitability and cash flows.
Operating difficulties at our manufacturing plants could adversely affect our operating results.
Producing starches and sweeteners through corn refining is a capital intensive industry. We have 44 plants and have preventive maintenance and de-bottlenecking programs designed to maintain and improve grind capacity and facility reliability. If we encounter operating difficulties at a plant for an extended period of time or start-up problems
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with any capital improvement projects, we may not be able to meet a portion of sales order commitments and could incur significantly higher operating expenses, both of which could adversely affect our operating results. We also use boilers to generate steam required in our manufacturingproduction processes. An event that impaired the operation of a boiler for an extended period of time could have a significant adverse effect on the operations of any plant in which such event occurred.
Also, we are subject to risks related to such matters as product safety and quality; compliance with environmental, health and safety and food safety regulations; and customer product liability claims. The liabilities that could result from these risks may not always be covered by, or could exceed the limits of, our insurance coverage related to product liability and food safety matters. In addition, negative publicity caused by product liability and food safety matters may damage our reputation. The occurrence of any of the matters described above could adversely affect our revenues and operating results.
We operate a multinational business subject to the economic, political, and other risks inherent in operating in foreign countries and with foreign currencies.
We have operated in foreign countries and with foreign currencies for many years. Our results are subject to foreign currency exchange fluctuations. Our operations are subject to political, economic, and other risks. There has been
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and continues to be significant political uncertainty in some countries in which we operate. Economic changes, terrorist activity, and political unrest may result in business interruption or decreased demand for our products. Protectionist trade measures and import and export licensing requirements could also adversely affect our results of operations. Our success will depend in part on our ability to manage continued global political and economic uncertainty.
We primarily sell products derived from world commodities. Historically, we have been able to adjust local prices relatively quickly to offset the effect of local currency devaluations versus the U.S. dollar, although we cannot guarantee our ability to do this in the future. For example, due to pricing controls on many consumer products imposed in the recent past by the Argentine government, it takes longer than it had previously taken to achieve pricing improvement in response to currency devaluations versus the U.S. dollar in that country. The anticipated strength in the U.S. dollar may continue to provide some challenges, as it could take an extended period of time to fully recapture the impact of foreign currency devaluations versus the U.S. dollar, particularly in South America.
We may hedge transactions that are denominated in a currency other than the currency of the operating unit entering into the underlying transaction. We are subject to the risks normally attendant to such hedging activities.
Our information technology systems, processes, and sites may suffer interruptions, security breaches, or failures which may affect our ability to conduct our business.
Our operations rely on certain key information technology systems, which are dependent on services provided by third parties, provide critical data connectivity, information, and services for internal and external users. These interactions include, but are not limited to: ordering and managing materials from suppliers, risk management activities, converting raw materials to finished products, inventory management, shipping products to customers, processing transactions, summarizing and reporting results of operations, human resources benefits and payroll management, complying with regulatory, legal and tax requirements, and other processes necessary to manage our business. Increased information technology security and social engineering threats and more sophisticated computer crime, including advanced persistent threats, pose potential risks to the security of our information technology systems, networks and services, as well as the confidentiality, availability and integrity of our third-party and employee data. We have put in place security measures to protect ourselves against cyber-based attacks and disaster recovery plans for our critical systems. However, if our information technology systems are breached, damaged, or cease to function properly due to any number of causes, such as catastrophic events, power outages, security breaches, or cyber-based attacks, and if our disaster recovery plans do not effectively mitigate the risks on a timely basis, we may encounter significant disruptions that could interrupt our ability to manage our operations, cause loss of valuable data and actual or threatened legal actions, and cause us to suffer damage to our reputation, all of which may adversely impact our revenues, operating results, and financial condition. Our recent malware incident which lasted from October 2019 to December 2019 is one example of this type of risk, although this particular incident did not result in any material impact to our revenues, operating results, or financial condition.
The costs to address the foregoing security problems and security vulnerabilities before or after a cyber incident could be significant. Remediation efforts may not be successful and could result in interruptions, delays or cessation of service and loss of existing or potential customers that may impede our sales, manufacturing or other critical functions. Breaches of our security measures and the unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or other third parties could expose us, our customers or other third parties affected to a risk of loss or misuse of this information, result in regulatory enforcement, litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. We rely in certain limited capacities on third-party data management providers and other vendors whose possible security problems and security vulnerabilities may have similar effects on us.
Our profitability could be negatively impacted if we fail to maintain satisfactory labor relations.
As of December 31, 2019, approximately 31 percent of our U.S. employees and 36 percent of our non-U.S. employees were members of unions. Strikes, lockouts, or other work stoppages or slowdowns involving our unionized employees could have a material adverse effect on us.
19
Natural disasters, war, acts and threats of terrorism, pandemics, and other significant events could negatively impact our business.
The economies of any countries in which we sell or manufacture products or purchase raw materials could be affected by natural disasters. Such natural disasters could include, among others, earthquakes, floods, or severe weather; war, acts of war, or terrorism; or the outbreak of an epidemic or pandemic; such as the ongoing coronavirus outbreak emanating from China at the beginning of 2020. Any such natural disaster could result in asset write-offs, decreased sales and overall reduced cash flows.
The recognition of impairment charges on goodwill or long-lived assets could adversely impact our future financial position and results of operations.
We have $1.2 billion of total intangible assets as of December 31, 2019, consisting of $801 million of goodwill and $437 million of other intangible assets, which constitute 13 percent and 7 percent, respectively, of our total assets as of such date. Additionally, we have $2.6 billion of long-lived assets, or 44 percent of our total assets, as of December 31, 2019.
We perform an annual impairment assessment for goodwill and our indefinite-lived intangible assets, and as necessary, for other long-lived assets. If the results of such assessments were to show that the fair value of these assets were less than the carrying values, we could be required to recognize a charge for impairment of goodwill or long-lived assets, and the amount of the impairment charge could be material. We continue to monitor our reporting units in struggling economies and recent acquisitions for challenges in these businesses that may negatively impact the fair value of these reporting units.
The future occurrence of a potential indicator of impairment, such as a significant adverse change in the business climate that would require a change in our assumptions or strategic decisions made in response to economic or competitive conditions, could require us to perform an assessment prior to the next required assessment date of July 1, 2020.
Changes in our tax rates or exposure to additional income tax liabilities could impact our profitability.
We are subject to income taxes in the U.S. and in various other foreign jurisdictions. Our effective tax rates could be adversely affected by changes in the mix of earnings by jurisdiction, changes in tax laws, or tax rates changes in the valuation of deferred tax assets and liabilities and material adjustments from tax audits.
The Tax Cuts and Jobs Act (“TCJA”), which was enacted in December 2017, significantly altered existing U.S. tax law and includes numerous and complex provisions that substantially affect our business. The U.S. Treasury Department and the Internal Revenue Service continue to interpret and issue guidance on provisions of the TCJA that could differ from the way in which we interpret some of the provisions. Consequently, we may make adjustments to our provision for income taxes based on differences in interpretation in the periods in which guidance is issued.
Significant changes in the tax laws of the U.S. and numerous foreignjurisdictions in which we do business could result from the base erosion and profit shifting (“BEPS”) project undertaken by the Organization for Economic Cooperation and Development (“OECD”). AnOECD-led coalition of 44 countries is contemplating changes to long-standing international tax norms that determine each country’s right to tax cross-border transactions. These contemplated changes, as adopted bycountries in which we do business, could increase tax uncertainty and the riskof double taxation, thereby adversely affecting our provision forincome taxes.
The recoverability of our deferred tax assets, which are predominantly in Brazil, Canada, Germany, Mexico, and the U.S., is dependent upon our ability to generate future taxable income in these jurisdictions. In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions and a material assessment by a governing tax authority could affect our profitability and cash flows.
20
We may not have access to the funds required for future growth and expansion.
We may need additional funds to grow and expand our operations. We expect to fund our capital expenditures from operating cash flow to the extent we are able to do so. If our operating cash flow is insufficient to fund our capital expenditures, we may either reduce our capital expenditures or utilize our general credit facilities. For further strategic growth through mergers or acquisitions, we may also seek to generate additional liquidity through the sale of debt or equity securities in private or public markets or through the sale of non-productive assets. We cannot provide any assurance that our cash flows from operations will be sufficient to fund anticipated capital expenditures or that we will be able to obtain additional funds from financial markets or from the sale of assets at terms favorable to us. If we are unable to generate sufficient cash flows or raise sufficient additional funds to cover our capital expenditures or other strategic growth opportunities, we may not be able to achieve our desired operating efficiencies and expansion plans, which may adversely impact our competitiveness and, therefore, our results of operations. Our working capital requirements, including margin requirements on open positions on futures exchanges, are directly affected by the price of corn and other agricultural commodities, which may fluctuate significantly and change quickly.
We may not successfully identify and complete acquisitions or strategic alliances on favorable terms or achieve anticipated synergies relating to any acquisitions or alliances, and such acquisitions could result in unforeseen operating difficulties and expenditures and require significant management resources.
We regularly review potential acquisitions of complementary businesses, technologies, services or products, as well as potential strategic alliances. We may be unable to find suitable acquisition candidates or appropriate partners with which to form partnerships or strategic alliances. Even if we identify appropriate acquisition or alliance candidates, we may be unable to complete such acquisitions or alliances on favorable terms, if at all. In addition, the process of integrating an acquired business (such as TIC Gums), technology, service or product into our existing business and operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may require significant management resources that otherwise would be available for ongoing development of our business. Moreover, we may not realize the anticipated benefits of any acquisition or strategic alliance, and such transactions may not generate anticipated financial results. Future acquisitions could also require us to issue equity securities, incur debt, assume contingent liabilities or amortize expenses related to intangible assets, any of which could harm our business.
An inability to contain costs could adversely affect our future profitability and growth.
Our future profitability and growth depends on our ability to contain operating costs and per-unit product costs and to maintain and/or implement effective cost control programs, while at the same time maintaining competitive pricing and superior quality products, customer service and support. Our ability to maintain a competitive cost structure depends on continued containment of manufacturing, delivery and administrative costs, as well as the implementation of cost-effective purchasing programs for raw materials, energy and related manufacturing requirements.
If we are unable to contain our operating costs and maintain the productivity and reliability of our production facilities, our profitability and growth could be adversely affected.
20
Increased interest rates could increase our borrowing costs.
From time to time we may issue securities to finance acquisitions, capital expenditures, working capital and for other general corporate purposes. An increase in interest rates in the general economy could result in an increase in our borrowing costs for these financings, as well as under any existing debt that bears interest at an unhedged floating rate.
Volatility in the stock market, fluctuations in quarterly operating results, and other factors could adversely affect the market price of our common stock.
The market price for our common stock may be significantly affected by factors such as our announcement of new products or services or such announcements by our competitors; technological innovation by us, our competitors or other vendors; quarterly variations in our operating results or the operating results of our competitors; general conditions in our or our customers’ markets; and changes in the earnings estimates by analysts or reported results that vary materially from such estimates. In addition, the stock market has experienced significant price fluctuations that have affected the market prices of equity securities of many companies that have been unrelated to the operating performance of any individual company.
No assurance can be given that we will continue to pay dividends.dividends, or as to the amount of any dividend we pay.
The payment of dividends, as well as the amount of any dividends, is at the discretion of our Board of Directors and will be subject to our financial results and the availability of statutory surplus funds to pay dividends.
Our profitability may be affected by other factors beyond our control.
Our operating income and ability to increase profitability depend to a large extent upon our ability to price finished products at a level that will cover manufacturing and raw material costs and provide an acceptable profit margin. Our ability to maintain appropriate price levels is determined by a number of factors largely beyond our control, such as aggregate industry supply and market demand, which may vary from time to time, and the economic conditions of the geographic regions in which we conduct our operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
NoneNone.
21
We own or lease (as noted below), directly and through our consolidated subsidiaries, 44 manufacturing facilities. In addition, we lease our corporate headquarters in Westchester, Illinois and our research and development facility in Bridgewater, New Jersey.
The following list details the locations of our manufacturing facilities within each of our four reportable business segments:segments as of February 1, 2020:
| | | | | | |
North America |
| South America | |
|
| EMEA |
Cardinal, Ontario, Canada |
| Baradero, Argentina | |
|
| Hamburg, Germany |
London, Ontario, Canada |
| Chacabuco, Argentina | |
|
| Cornwala, Pakistan |
San Juan del Rio, Queretaro, Mexico |
| Balsa Nova, Brazil | |
|
| Faisalabad, Pakistan |
Guadalajara, Jalisco, Mexico |
| Cabo, Brazil | |
|
| Mehran, Pakistan |
Mexico City, Edo, Mexico |
| Mogi-Guacu, Brazil | |
|
| Goole, United Kingdom(b) |
Oxnard, California, U.S.(a) |
| Rio de Janeiro, Brazil | |
| ||
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| | | ||
Idaho Falls, Idaho, U.S. |
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| |
| | |
Bedford Park, Illinois, U.S. |
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| |
| | |
Mapleton, Illinois, U.S. |
| Lima, Peru | | | | |
Indianapolis, Indiana, U.S. | | | | | | |
Cedar Rapids, Iowa, U.S. |
| | | | | |
Fort Fairfield, Maine, U.S. |
| | | | | |
Belcamp, Maryland, U.S. | | | | | | |
North Kansas City, Missouri, U.S. | | | | | | |
Winston-Salem, North Carolina, U.S. | | | | | | |
Grand Forks, North Dakota, U.S. | | | | | | |
Salem, Oregon, U.S. | | | | | | |
Berwick, Pennsylvania, U.S. | | | | | | |
Charleston, South Carolina, U.S. | | | | | | |
| | |||||
Richland, Washington, U.S. | | | | | | |
Moses Lake, Washington, U.S. | | | | | | |
Plover, Wisconsin, U.S. | | | | | | |
| (a) |
| Facility is leased. |
| (b) | Facility is partially owned and partially leased. |
We believe our manufacturing facilities are sufficient to meet our current production needs. We have preventive maintenance and de-bottlenecking programs designed to further improve grind capacity and facility reliability.
We have electricity co-generation facilities at our plants in London, Ontario, Canada; Stockton, California;Cardinal, Ontario, Canada; Bedford Park, Illinois;Illinois, U.S.; Winston-Salem, North Carolina;Carolina, U.S.; San Juan del Rio and Mexico City, Mexico; Cali, Colombia; Cornwala, Pakistan; and Balsa Nova and Mogi-Guacu, Brazil, that provide electricity at a lower cost than is available from third parties. We generally own and operate these co-generation facilities, except for the facilities at our Mexico City, Mexico; and Balsa Nova and Mogi-Guacu, Brazil locations, which are owned by, and operated pursuant to co-generation agreements with third parties. We are constructing a co-generation facility at our plant in Cardinal, Ontario.
In recent years, we have made significant capital expenditures to update, expand and improve our facilities, spending $284$328 million in 2016.2019. We believe these capital expenditures will allow us to operate efficient facilities for the foreseeable future. We currently anticipate that capital expenditures for 2017 will approximate $300-$325 million.
22
We areThe Company’s subsidiary, National Starch and Chemical (Thailand) Co. Ltd., self-reported to the Rayong Provincial Department of Industry of the Ministry of Industry (the “DIW”) an administrative error in registering one of its waste transporters in Thailand. The DIW notified National Starch and Chemical (Thailand) Co. Ltd. of failure to comply with Section 8 (5) of the Factory Act in connection with the waste transporter and, in May 2019, imposed fines on a partyper shipment basis totaling THB 3,330,000, or approximately $107,000. There was no assertion by the DIW or the Ministry of Industry that any harm had been caused to a large number of labor claims relatingthe environment. The fines were paid in May 2019 and this administrative error is not expected to our Brazilian operations. We have reserved an aggregate of approximately $5 million as of December 31, 2016 in respect of these claims. These labor claims primarily relate to dismissals, severance, health and safety, work schedules and salary adjustments.reoccur.
We are currently subject to various other claims and suits arising in the ordinary course of business, including labor matters, certain environmental proceedings, and other commercial claims. We also routinely receive inquiries from regulators and other government authorities relating to various aspects of our business, including with respect to compliance with laws and regulations relating to the environment, and at any given time, we have matters at various stages of resolution with the applicable governmental authorities. The outcomes of these matters are not within our complete control and may not be known for prolonged periods of time. We do not believe that the results of currently known legal proceedings and inquires even if unfavorable to us, will be material to us. There can be no assurance, however, that such claims, suits or investigations or those arising in the future, whether taken individually or in the aggregate, will not have a material adverse effect on our financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
23
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Trading:Shares of our common stock are traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “INGR.”
Holders: The number of holders of record of our common stock was 4,4463,633 at January 31, 2017.2020.
Dividends:We have a history of paying quarterly dividends. The amount and timing of the dividend payment, if any, is based on a number of factors including estimated earnings, financial position and cash flow. The payment of a dividend, as well as the amount of any dividend, is solely at the discretion of our Board of Directors. Future dividend payments will be subject to our financial results and the availability of funds and statutory surplus to pay dividends.
The quarterly high and low market prices for our common stock and cash dividends declared per common share for 2015 and 2016 are shown below.
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|
| 1st QTR |
| 2nd QTR |
| 3rd QTR |
| 4th QTR |
| ||||
2016 |
|
|
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|
|
|
|
|
|
High |
| $ | 108.00 |
| $ | 129.42 |
| $ | 140.00 |
| $ | 137.62 |
|
Low |
|
| 84.57 |
|
| 104.24 |
|
| 128.18 |
|
| 113.92 |
|
Per share dividends declared |
| $ | 0.45 |
| $ | 0.45 |
| $ | 0.50 |
| $ | 0.50 |
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2015 |
|
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|
|
High |
| $ | 86.80 |
| $ | 83.00 |
| $ | 93.87 |
| $ | 99.64 |
|
Low |
|
| 75.11 |
|
| 76.26 |
|
| 79.31 |
|
| 85.85 |
|
Per share dividends declared |
| $ | 0.42 |
| $ | 0.42 |
| $ | 0.45 |
| $ | 0.45 |
|
Issuer Purchases of Equity Securities:
The following table summarizes information with respect to our purchases of our common stock during the fourth quarter of 2016.2019.
| | | | | | | | | | ||
| | | | | | | | Maximum Number | |||
| | | | | | | | (or Approximate | |||
| | | | | | Total Number of | | Dollar Value) of | |||
| | Total | | Average | | Shares Purchased as | | Shares | |||
| | Number | | Price | |
| | be Purchased Under | |||
| | of Shares | | Paid | | Announced Plans or | | the Plans or Programs | |||
(shares in thousands) | | Purchased | | per Share | | Programs | | at | | ||
October 1 – October 31, |
| — |
| — |
| — |
|
| | ||
November 1 – November 30, |
| — |
| — |
| — |
|
| | ||
December 1 – December 31, | | — |
| — |
| — | |
|
| | |
Total |
| — |
| — |
| — | | | |
On December 12, 2014, the Board of Directors authorized a new stock repurchase program permitting the Companyus to purchase up to 55.0 million of itsour outstanding shares of common sharesstock from January 1, 2015, through December 31, 2019. On October 22, 2018, the Board of Directors authorized a new stock repurchase program permitting us to purchase up to an additional 8.0 million of our outstanding shares of common stock from November 5, 2018 through December 31, 2023. At December 31, 2016,2019, we have 4.75.9 million shares available for repurchase under the stock repurchase program.programs.
24
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is provided below.
| | | | | | | | | | | | | | | | |
(in millions, except per share amounts) |
| 2019 (a) |
| 2018 |
| 2017 |
| 2016 (b) |
| 2015 (c) |
| |||||
Summary of operations: | | | | | | | | | | | | | | | | |
Net sales (j) | | $ | 6,209 | | $ | 6,289 | | $ | 6,244 | | $ | 6,022 | | $ | 5,958 | |
Net income attributable to Ingredion | | | 413 | (d) | | 443 | (e) | | 519 | (f) | | 485 | (g) |
| 402 | (h) |
Net earnings per common share of Ingredion: | | | | | | | | | | | | | | | | |
Basic | | | 6.17 | (d) | | 6.25 | (e) | | 7.21 | (f) | | 6.70 | (g) | | 5.62 | (h) |
Diluted | | | 6.13 | (d) | | 6.17 | (e) | | 7.06 | (f) | | 6.55 | (g) | | 5.51 | (h) |
Cash dividends declared per common share of Ingredion | | | 2.51 | | | 2.45 | | | 2.20 | | | 1.90 | | | 1.74 | |
Balance sheet data: | | | | | | | | | | | | | | | | |
Working capital | | $ | 1,193 | | $ | 1,192 | | $ | 1,458 | | $ | 1,274 | | $ | 1,208 | |
Property, plant and equipment, net | | | 2,306 | | | 2,198 | | | 2,217 | | | 2,116 | |
| 1,989 | |
Total assets | | | 6,040 | | | 5,728 | | | 6,080 | | | 5,782 | |
| 5,074 | |
Long-term debt | | | 1,766 | | | 1,931 | | | 1,744 | | | 1,850 | |
| 1,819 | |
Total debt | | | 1,848 | | | 2,100 | | | 1,864 | | | 1,956 | |
| 1,838 | |
Total equity (i) | | $ | 2,741 | | $ | 2,408 | | $ | 2,917 | | $ | 2,595 | | $ | 2,180 | |
Shares outstanding, year end | | | 66.8 | | | 66.5 | | | 72.0 | | | 72.4 | |
| 71.6 | |
Additional data: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 220 | | $ | 247 | | $ | 209 | | $ | 196 | | $ | 194 | |
Mechanical stores expense | | | 57 | | | 57 | | | 57 | | | 57 | | | 57 | |
Capital expenditures and mechanical stores purchases | | | 328 | | | 350 | | | 314 | | | 284 | |
| 280 | |
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|
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|
|
|
(in millions, except per share amounts) |
| 2016 (a) |
| 2015 (b) |
| 2014 |
| 2013 |
| 2012 |
| |||||
Summary of operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 5,704 |
| $ | 5,621 |
| $ | 5,668 |
| $ | 6,328 |
| $ | 6,532 |
|
Net income attributable to Ingredion |
|
| 485 | (c) |
| 402 | (d) |
| 355 | (e) |
| 396 |
|
| 428 | (f) |
Net earnings per common share of Ingredion: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 6.70 | (c) | $ | 5.62 | (d) | $ | 4.82 | (e) | $ | 5.14 |
| $ | 5.59 | (f) |
Diluted |
| $ | 6.55 | (c) | $ | 5.51 | (d) | $ | 4.74 | (e) | $ | 5.05 |
| $ | 5.47 | (f) |
Cash dividends declared per common share of Ingredion |
| $ | 1.90 |
| $ | 1.74 |
| $ | 1.68 |
| $ | 1.56 |
| $ | 0.92 |
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
| $ | 1,274 |
| $ | 1,208 |
| $ | 1,423 |
| $ | 1,394 |
| $ | 1,427 |
|
Property, plant and equipment-net |
|
| 2,116 |
|
| 1,989 |
|
| 2,073 |
|
| 2,156 |
|
| 2,193 |
|
Total assets |
|
| 5,782 |
|
| 5,074 |
|
| 5,085 |
|
| 5,353 |
|
| 5,583 |
|
Long-term debt |
|
| 1,850 |
|
| 1,819 |
|
| 1,798 |
|
| 1,710 |
|
| 1,715 |
|
Total debt |
|
| 1,956 |
|
| 1,838 |
|
| 1,821 |
|
| 1,803 |
|
| 1,791 |
|
Total equity (g) |
| $ | 2,595 |
| $ | 2,180 |
| $ | 2,207 |
| $ | 2,429 |
| $ | 2,459 |
|
Shares outstanding, year end |
|
| 72.4 |
|
| 71.6 |
|
| 71.3 |
|
| 74.3 |
|
| 77.0 |
|
Additional data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 196 |
| $ | 194 |
| $ | 195 |
| $ | 194 |
| $ | 211 |
|
Capital expenditures |
|
| 284 |
|
| 280 |
|
| 276 |
|
| 298 |
|
| 313 |
|
| (a) |
|
| (b) | Includes TIC Gums Incorporated at December 31, 2016 for balance sheet data only. |
| (c) |
| Includes Penford Corporation (“Penford”) from March 11, 2015 forward and Kerr Concentrates, Inc. (“Kerr”) from August 3, 2015 forward. |
| (d) |
|
| (e) | Includes after-tax restructuring charges of |
| (f) | Includes after-tax restructuring charges of $31 million consisting of employee-related severance and other costs associated with the restructuring in Argentina, restructuring charges related to the abandonment of certain assets related to our leaf extraction process in Brazil, employee-related severance and other costs associated with the Finance Transformation initiative, and other restructuring charges including employee-related severance costs in North America and a refinement of estimates for prior year restructuring activities. Additionally, includes after-tax charge of $23 million to the provision for income taxes related to the enactment of the TCJA in December 2017, $6 million related to the flow-through of costs primarily associated with the sale of TIC Gums inventory that was adjusted to fair value at the acquisition date in accordance with business combination accounting rules, and $3 million associated with the integration of acquired operations, partially offset by a tax benefit of $10 million due to deductible foreign exchange loss resulting from the tax settlement between the U.S. and Canada, and a $6 million after-tax gain from an insurance settlement primarily related to capital reconstruction. |
| (g) | Includes after-tax restructuring charges of $14 million consisting of employee severance-related charges and other costs associated with the execution of global IT outsourcing contracts, severance-related costs attributable to our optimization initiatives in North America and South America, and additional charges pertaining to our 2015 Port Colborne plant |
| (h) |
| Includes after-tax charges for impaired assets and restructuring costs of $18 million, |
25
| at the respective acquisition dates in accordance with business combination accounting rules, after-tax costs of $4 million |
| (i) |
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| (j) |
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2526
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEWOverview
We are a major supplier of high-quality food and industrial ingredientsingredient solutions to customers around the world. We have 44 manufacturing plants located in North America, South America, Asia PacificAsia-Pacific and Europe, the Middle East and Africa (“EMEA”), and we manage and operate our businesses at a regional level. We believe this approach provides us with a unique understanding of the cultures and product requirements in each of the geographic markets in which we operate, bringing added value to our customers. Our ingredients are used by customers in the food, beverage, brewing, and animal feed paper and corrugating, and brewing industries, among others.
Our Strategic Blueprint continues to guide our decision-making and strategic choices with an emphasisgrowth strategy is centered on delivering value-added ingredientsingredient solutions for our customers. The foundation of our Strategic Blueprintstrategy is operationaloperating excellence, which includes our focus on safety, quality and continuous improvement. We see growth opportunities in three areas. First is organic growth asareas: first, we workare working to expand our current business. Second,business through organic growth; second, we are focused on broadening our ingredient portfolio ofwith on-trend products through internal and external business development. Finally,development; finally, we look for growth from geographic expansion as we pursue extension of our reach to new locations. The ultimate goal of these strategies and actions is to deliver increased shareholder value.
Critical success factors in our business include managing our significant manufacturing costs, including costs for corn, other raw materials, and utilities. In addition, due to our global operations we are exposed to fluctuations in foreign currency exchange rates. We use derivative financial instruments, when appropriate, for the purpose of minimizing the risks and/orand costs associated with fluctuations in certain raw material and energy costs, foreign exchange rates, and interest rates. Also, the capital intensive nature of our business requires that we generate significant cash flow over time in order to selectively reinvest in our operations and grow organically, as well as through strategic acquisitions and alliances. We utilize certain key financial metrics relating to return on invested capital employed and financial leverage to monitor our progress toward achieving our strategic business objectives (see section entitled “Key Financial Performance Metrics”).
We had a strong year in 2016 as net sales,The financial results of 2019 for operating income, net income and diluted earnings per common share grewdeclined from 2015. This growth was driven principally by significantly improved2018. Operating income declined in 2019 from 2018 primarily due to lower operating results in all segments. The main drivers of the operating income decline were commodity margin pressures, higher production and supply chain costs, and unfavorable currency translation.
In July 2018, we announced a $125 million savings target for our Cost Smart program, designed to improve profitability, further streamline our global business, and deliver increased value to shareholders. We set Cost Smart savings targets to include an anticipated $75 million in cost of sales savings, including freight, and $50 million in anticipated SG&A savings by year end 2021.
Our Cost Smart program and other initiatives resulted in restructuring charges in 2019. During the year ended December 31, 2019, we recorded $57 million of pre-tax restructuring charges. We recorded $29 million for our Cost Smart Cost of sales program. We recorded $15 million of restructuring charges in relation to the closure of the Lane Cove, Australia production facility, consisting of $10 million of accelerated depreciation, $4 million of employee-related severance, and $1 million of other costs. We expect to incur additional expense of $10 million to $12 million in 2020 in relation to the closure, excluding potential proceeds from the sale of land and equipment. Additionally, during the year ended December 31, 2019, we recorded $3 million of employee-related expenses primarily related to the South America operations restructuring. Finally, we recorded $11 million of other costs, including professional services, during the year ended December 31, 2019, primarily in North America segment. Operating income also grewincluding other costs of $2 million in relation to the prior year cessation of wet-milling at the Stockton, California plant. We do not expect to incur any additional costs in relation to the cessation of wet-milling at the Stockton, California plant. We recorded pre-tax restructuring charges of $28 million for the year ended December 31, 2019 for the Cost Smart SG&A program. These costs include $15 million, of other costs, including professional services, and $13 million of employee-related severance for the year ended December 31, 2019. These charges were recorded primarily in the Company’s North America and South America operations, and include $2 million of other costs associated with the Finance Transformation initiative in Latin America for the year ended December
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31, 2019. The Company expects to continue to incur additional charges in 2020 related to the Cost Smart SG&A program, however, it does not expect to incur any additional restructuring costs related to its Finance Transformation initiative.
Our cash provided by operating activities decreased to $680 million for the year ended December 31, 2019, from $703 million in the prior year primarily due to lower current year net earnings. Our cash used for financing activities decreased during the year ended December 31, 2019, compared to the prior year, primarily due to the repurchase of 5.8 million shares of our Asia Pacific and EMEA segments, which was partiallyoutstanding common stock in 2018 offset by lower resultsour debt repayments in 2019.
As previously announced on October 15, 2019 and November 19, 2019, we detected suspicious activity affecting several servers within certain data centers on our South America segment. In North America, our largest segment, operating income for 2016 rose 27 percent principally driven by improved product price/mixnetwork. Immediately, we took steps to identify and operating efficiencies incontain the segment. South America operating income declined 12 percent in 2016 reflecting the difficult macroeconomic environment in the region. Asia Pacific operating income grew 4 percent as volume growth and good cost control more than offsetsituation, which included engaging a third-party consultant. We assessed the impact of reduced product selling pricesthe incident and local currency weakness in the segment. Operating income in EMEA increased 14 percent driven by volume growth and lower raw material and energy costs, which more than offset thedid not identify any impact of local currency weakness in the segment.
Our operating cash flow rose to $771 million in 2016 from $686 million in 2015, and we continued to advance our Strategic Blueprint by investing in our business, growing our product portfolio and rewarding shareholders.
On December 29, 2016, we acquired TIC Gums Incorporated (“TIC Gums”), a US-based company that provides advanced texture systems to the food and beverage industry. Consistent with our Strategic Blueprint for growth, this acquisition enhances our texture capabilities and formulation expertise and provides additional opportunities for us to provide solutions for natural, organic and clean-label demands of our customers. TIC Gums utilizes a variety of agriculturally derived ingredients, such as acacia gum and guar gum, to form the foundation for innovative texture systems and allow for clean-label reformulation. TIC Gums operates two production facilities, one in Belcamp, Maryland and one in Guangzhou, China. TIC Gums also maintains an R&D lab in each of these facilities. We funded the $395 million acquisition with cash on hand and short-term borrowings.
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On November 29, 2016, we completed our acquisition of Shandong Huanong Specialty Corn Development Co., Ltd. (“Shandong Huanong”) in China for $12 million in cash. The acquisition of Shandong Huanong, located in Shandong Province, adds a second manufacturing facility to our operations in China. It produces starch rawfinancial reporting systems nor any material forimpacts to our plant in Shanghai, which makes value-added ingredients forKey Financial Performance Metrics discussed below. We incurred immaterial costs to perform these necessary remediation efforts during the food industry. The transaction represents another step in executing our Strategic Blueprint for growth.three months ended December 31, 2019. We expect it to enhance our capacity in the Asia-Pacific segment with a vertically integrated manufacturing base for specialty ingredients. The acquisition didare not have a material impact on our financial condition, resultsaware of operationsany evidence that any customer, supplier, or cash flows.
On August 17, 2016, we announced that we entered into a definitive agreement to acquire the rice starch and rice flour business from Sun Flour Industry Co, Ltd. based in Banglen, Thailand. This pending acquisition supports our global strategy to increase our specialty ingredients business andemployee data has been approvedimproperly accessed, misused or transferred by our board of directors. This transaction should enhance our global supply chain and leverage other capital investments that we have madeany third party. The remediation work related to this incident was completed in Thailand to grow our specialty ingredients and service customers around the world. The acquisition is subject to approval by Thailand government authorities as well as to other customary closing conditions. The acquisition is not expected to have a material impact on our financial condition, results of operations or cash flows.December 2019.
We also refinanced $350 million of term loan debt and entered into a new $1 billion revolving credit facility in 2016. Additionally, we increased our quarterly cash dividend by 11 percent to $0.50 per share of common stock.
Looking ahead, we anticipate that our operating income and net income will grow in 2017 compared to 2016. In North America, we expect operating income to increase driven by improved product mix and margins. In South America, we expect another challenging year. We believe that operating income will increase from 2016 despite continued slow economic growth and local foreign currency weakness. We intend to continue to maintain a high degree of focus on cost and network optimization during 2017 as we manage through the difficult macroeconomic environment in this segment. In the longer-term, we believe that the underlying business fundamentals for our South American segment are positive for the future and we believe that we are well-positioned to take advantage of an economic recovery when it materializes. We expect operating income growth in Asia Pacific and EMEA in 2017, despite anticipated currency headwinds associated with a stronger US dollar. We anticipate that this improvement will be driven primarily from growth in our specialty ingredient product portfolio and effective cost control.
We currently expect that our available cash balances, future cash flow from operations, access to debt markets, and borrowing capacity under our credit facilities will provide us with sufficient liquidity to fund our anticipated capital expenditures, dividends, and other investing and/orand financing activities for the foreseeable future. Our future cash flow needs will depend on many factors, including our rate of revenue growth, the timing and extent of our expansion into new markets, the timing of introductions of new products, potential acquisitions of complementary businesses and technologies, continuing market acceptance of our new products, and general economic and market conditions. We may need to raise additional capital or incur indebtedness to fund our needs for less predictable strategic initiatives, such as acquisitions.
RESULTS OF OPERATIONSResults of Operations
We have significant operations in four reporting segments: North America, South America, Asia PacificAsia-Pacific and EMEA. For most of our foreign subsidiaries, the local foreign currency is the functional currency. Accordingly, revenues and expenses denominated in the functional currencies of these subsidiaries are translated into USU.S. dollars at the applicable average exchange rates for the period. Fluctuations in foreign currency exchange rates affect the USU.S. dollar amounts of our foreign subsidiaries’ revenues and expenses. In the second quarter of 2018, the Argentine peso rapidly devalued relative to the U.S. dollar, which along with increased inflation, resulted in a three-year cumulative inflation in that country which exceeded 100 percent as of June 30, 2018. As a result, we adopted highly inflationary accounting as of July 1, 2018, for our Argentina affiliate in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). Under highly inflationary accounting, our affiliate’s functional currency becomes the U.S. dollar, and its income statement and balance sheet will be measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on Argentine peso-denominated monetary assets and liabilities will be reflected in earnings in Financing costs. The impact of all foreign currency exchange rate changes, where significant, is provided below.
We acquired Penford CorporationWestern Polymer LLC (“Penford”Western Polymer”) and Kerr Concentrates, Inc.Sun Flour Industry Co., Ltd. (“Kerr”Sun Flour”) on March 11, 20151, 2019, and August 3, 2015,March 9, 2017, respectively. The results of the acquired businesses are included in our consolidated financial results within the North America reporting segment from the respective acquisition dates forward. While we identify significant fluctuations due to the acquisitions, our discussion below also addresses results of operations absentexcluding the impact of the acquisitions and the results of the acquired businesses, where appropriate, to provide a more comparable and meaningful analysis.
2016
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2019 Compared to 20152018 – Consolidated
| | | | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2019 |
| 2018 |
| Variance | | Percentage | | |||
Net sales | | $ | 6,209 | | $ | 6,289 | | $ | (80) | | (1) | % |
Cost of sales | | | 4,897 | | | 4,921 | | | 24 | | — | % |
Gross profit | | | 1,312 | | | 1,368 | | | (56) | | (4) | % |
| | | | | | | | | | | | |
Operating expenses | | | 610 | | | 611 | | | 1 | | — | % |
Other income, net | | | (19) | | | (10) | | | 9 | | 90 | % |
Restructuring/impairment charges | | | 57 | | | 64 | | | 7 | | 11 | % |
| | | | | | | | | | | | |
Operating income | | | 664 | | | 703 | | | (39) | | (6) | % |
| | | | | | | | | | | | |
Financing costs, net | | | 81 | | | 86 | | | 5 | | 6 | % |
Other, non-operating expense/(income), net | | | 1 | | | (4) | | | (5) | | (125) | % |
| | | | | | | | | | | | |
Income before income taxes | | | 582 | | | 621 | | | (39) | | (6) | % |
Provision for income taxes | | | 158 | | | 167 | | | 9 | | 5 | % |
Net income | | | 424 | | | 454 | | | (30) | | (7) | % |
Less: Net income attributable to non-controlling interests | | | 11 | | | 11 | | | — | | — | % |
Net income attributable to Ingredion | | $ | 413 | | $ | 443 | | $ | (30) | | (7) | % |
Net Income attributable to Ingredion. Net income attributable to Ingredion for 2016 increased2019 decreased to $485$413 million or $6.55 per diluted common share, from $402$443 million or $5.51 per diluted common share in 2015.2018. Our results for 2016 include a $272019 included $35 million charge ($0.36 per diluted common share) for an income tax settlementof one-time after-tax net costs, driven primarily by after-tax restructuring costs of $44 million. The restructuring charges consist of costs associated with our Cost Smart Cost of sales program and our Cost Smart SG&A program (see Note 95 of the Notes to the Consolidated Financial Statements for additional information),.
Our results for 2018 included $54 million of one-time after-tax net costs, driven primarily by after-tax restructuring costs of $15 million ($0.20 per diluted common
27
share) consistingcosts associated with our Cost Smart Cost of employee severance-related chargessales program in relation to the cessation of wet-milling at the Stockton, California plant, costs related to the Cost Smart SG&A program, including employee-related severance and other costs associatedfor restructuring projects in the South America, Asia-Pacific, and North America segments, costs related to the Latin America and North America Finance Transformation initiatives, and costs related to the cessation of our leaf extraction process in Brazil. During the year ended December 31, 2018, we adjusted our provisional amounts related to enactment of the Tax Cuts and Jobs Act ("TCJA") and recognized an incremental $3 million of tax expense related to the TCJA.
Net sales. Net sales were slightly down for the year ended December 31, 2019 as compared to the year ended December 31, 2018. Changes in foreign currency exchange rates and volume reduction due to the cessation of Stockton wet milling were partially offset by favorable price/product mix.
Cost of sales. Cost of sales for year ended December 31, 2019 were flat when compared to the year ended December 31, 2018 primarily due to higher net corn costs. Our gross profit margin was 21 percent and 22 percent for the years ended December 31, 2019, and 2018, respectively. The gross profit margin decrease primarily reflected higher raw material costs.
Operating expenses. Operating expenses were flat when comparing the year ended December 31, 2019, to the year ended December 31, 2018. This was primarily driven by lower selling costs, offset by higher general administrative costs. Operating expenses, as a percentage of gross profit, were 46 percent for the year ended December 31, 2019, as compared to 45 percent for the year ended December 31, 2018.
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Other income, net. Our change in other income, net for the year ended December 31, 2019, as compared to the year ended December 31, 2018, was as follows:
| | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | |||||
(in millions) |
| 2019 |
| 2018 |
| Variance | |||
Brazil tax matter | | $ | 22 | | $ | — | | $ | 22 |
Value-added tax recovery | | | — | | | 5 | | | (5) |
Other | | | (3) | | | 5 | | | (8) |
Other income, net | | $ | 19 | | $ | 10 | | $ | 9 |
In January 2019, the Company’s Brazilian subsidiary received a favorable decision from the Federal Court of Appeals in Sao Paulo, Brazil, related to certain indirect taxes collected in prior years. As a result of the decision, the Company expects to be entitled to indirect tax credits against its Brazilian federal tax payments in 2020 and future years. The Company finalized its calculation of the amount of the credits and interest due from the favorable decision, concluding that the Company could be entitled to approximately $86 million of credits spanning a period from 2005 to 2018. The Department of Federal Revenue of Brazil, however, issued an Internal Ruling in which it charged that the Company is entitled to only $22 million of the calculated indirect tax credits and interest for the period from 2005 to 2014. The Brazil National Treasury has filed a motion for clarification with the executionBrazilian Supreme Court, asking the Court, among other things, to modify the lower court’s decision to approve the Internal Ruling, which could impact the decision in favor of global IT outsourcing contracts, severance-related costs attributable to optimization initiatives in North America and South America and additional charges pertaining to our 2015 Port Colborne plant sale. Additionally, our results for 2016 include after-tax costs of $2 million ($0.03 per diluted common share) associated with the integration of acquired operations. Our results for 2015 included after-tax charges of $11 million ($0.15 per diluted common share) for impaired assets and restructuring costs in Brazil and Canada, after-tax restructuring charges of $7 million ($0.10 per diluted common share) for employee severance-related costs associated with the Penford acquisition, after-tax costs of $7 million ($0.10 per diluted common share) associated with the acquisition and integration of both Penford and Kerr, after-tax costs of $6 million ($0.09 per diluted common share) relatingCompany. Due to the saleuncertainty arising from the issuance of Penford and Kerr inventory that was adjusted to fair value at the respective acquisition datesInternal Ruling, the Company recorded $22 million of credits in 2019 in accordance with business combination accounting rules, after-taxASC 450, Contingencies. The $22 million of future tax credits, which was recorded in the Consolidated Income Statement in Other income, resulted in additional deferred income taxes of $8 million. The income taxes will be paid as and when the tax credits are utilized. The Company continues to monitor the pending decisions within the Brazilian courts that may result in changes to the calculations and the timing of the recording of any additional gains and receipt of the benefits.
| | | | | | | | | | |
Financing costs, of $4net. Our financing costs, net for the year ended December 31, 2019 decreased $5 million ($0.06 per diluted common share) relating to a litigation settlement and an after-tax gain of $9 million ($0.12 per diluted common share) from the sale of our Port Colborne plant. Without theyear ended December 31, 2018, driven by a reduction in foreign currency losses, partly offset by higher interest expense.
Provision for income taxes. Our effective income tax settlement charge,rates for the restructuring, impairmentyears ended December 31, 2019 and acquisition-related charges,2018 were 27.1 percent and 26.9 percent, respectively.
The increase in the gaineffective tax rate was primarily driven by a reduction in the excess tax benefit related to share-based payment awards. This was offset by the revaluation of the Mexican Peso versus the U.S. dollar which impacted the U.S. dollar denominated balances held in Mexico compared to the devaluation of the Mexican Peso versus the U.S. dollar, in the prior year. Additionally, the effective tax rate was reduced from the plant sale andprior year due to relatively lower valuation allowances on Argentine net operating losses.
Net income attributable to non-controlling interests. Net income attributable to non-controlling interests for the litigation settlement costs, ouryear ended December 31, 2019, was flat when compared to the year ended December 31, 2018.
2019 Compared to 2018 – North America
| | | | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | | |||
Net sales to unaffiliated customers | | $ | 3,834 | | $ | 3,857 | | $ | (23) | | (1) | % |
Operating income | | | 522 | | | 545 | | | (23) | | (4) | % |
Net sales. Our decrease in net income and diluted earnings per share would have grown 23sales of 1 percent and 21 percent, respectively, from 2015. These increases primarily reflect significantly improved operating income in North America and, to a lesser extent, in Asia Pacific and EMEA,for the year ended December 31, 2019, as compared to 2015.
Net Sales. Net sales for 2016 increased to $5.70 billion from $5.62 billion in 2015.
A summary of net salesthe year ended December 31, 2018, was driven by reportable business segment is shown below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Increase |
|
|
| |
(in millions) |
| 2016 |
| 2015 |
| (Decrease) |
| % Change |
| |||
North America |
| $ | 3,447 |
| $ | 3,345 |
| $ | 102 |
| 3 | % |
South America |
|
| 1,010 |
|
| 1,013 |
|
| (3) |
| (0) | % |
Asia Pacific |
|
| 709 |
|
| 733 |
|
| (24) |
| (3) | % |
EMEA |
|
| 538 |
|
| 530 |
|
| 8 |
| 2 | % |
Total |
| $ | 5,704 |
| $ | 5,621 |
| $ | 83 |
| 1 | % |
The increase in net sales reflects price/product mix improvement of 5 percent partially offset by unfavorable currency translation of 4 percent due to the stronger US dollar. Volume was flat. Organic volume declined approximatelya 2 percent primarily reflecting the impact of the Port Colborne plant sale.
Net salesdecrease in North America for 2016 increased 3 percent reflecting price/product mix improvement of 4 percent, partiallyvolume, offset by a 1 percent improvement in price/product mix.
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Operating income. Our operating income decreased $23 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to higher net cost of corn and production costs, which were partially offset by favorable pricing.
2019 Compared to 2018 – South America
| | | | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | | |||
Net sales to unaffiliated customers | | $ | 960 | | $ | 988 | | $ | (28) | | (3) | % |
Operating income | | | 96 | | | 99 | | | (3) | | (3) | % |
Net sales. Our decrease in net sales of 3 percent for the year ended December 31, 2019, as compared to the year ended December 31, 2018, was driven by currency devaluations of 20 percent in Argentina and Brazil, partly offset by a 15 percent increase in price/product mix and 2 percent increase in volume.
Operating income. Our decrease in operating income of $3 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018, was primarily driven by foreign exchange impacts and higher net corn costs, which were partially offset by favorable pricing actions.
2019 Compared to 2018 – Asia-Pacific
| | | | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | | |||
Net sales to unaffiliated customers | | $ | 823 | | $ | 837 | | $ | (14) | | (2) | % |
Operating income | | | 87 | | | 104 | | | (17) | | (16) | % |
Net sales. Our decrease in net sales of 2 percent for the year ended December 31, 2019, as compared to the year ended December 31, 2018, was driven by unfavorable currency translation.
Operating income. Our decrease in operating income of $17 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018, was driven by higher regional input costs, increased net corn cost in Australia, and foreign exchange impacts.
2019 Compared to 2018 – EMEA
| | | | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | | |||
Net sales to unaffiliated customers | | $ | 592 | | $ | 607 | | $ | (15) | | (2) | % |
Operating income | | | 99 | | | 116 | | | (17) | | (15) | % |
Net sales. Our decrease in net sales of 2 percent for the year ended December 31, 2019, as compared to the year ended December 31, 2018, was driven unfavorable foreign exchange of 11 percent, offset by volume decline. Organic volume declined 4growth of 2 percent and improved price/product mix of 7 percent.
Operating income. Our decrease in operating income of $17 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018, was driven by higher raw material costs and unfavorable foreign exchange impacts, driven primarily by the impact of the Port Colborne plant sale. In South America, net sales for 2016 were flat as unfavorable currency translation of 17 percent and a 5 percent volume reduction offset price/product mix improvement of 22 percent. In Asia Pacific, net sales for 2016 decreased 3 percent as volume growth of 4 percentPakistan rupee, which was more thanpartially offset by a 5 percent price/product mix decline dueimproved price mix.
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2018 Compared to the pass through of lower raw material costs in pricing to our customers and unfavorable currency translation of 2 percent. EMEA net sales for 2016 increased 2 percent as volume growth of 6 percent more than offset unfavorable currency translation of 3 percent2017 – Consolidated
| | | | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2018 |
| 2017 |
| Variance | | Percentage | | |||
Net sales | | $ | 6,289 | | $ | 6,244 | | $ | 45 | | 1 | % |
Cost of sales | | | 4,921 | | | 4,772 | | | (149) | | (3) | % |
Gross profit | | | 1,368 | | | 1,472 | | | (104) | | (7) | % |
| | | | | | | | | | | | |
Operating expenses | | | 611 | | | 616 | | | 5 | | 1 | % |
Other income, net | | | (10) | | | (18) | | | (8) | | (44) | % |
Restructuring/impairment charges | | | 64 | | | 38 | | | (26) | | (68) | % |
| | | | | | | | | | | | |
Operating income | | | 703 | | | 836 | | | (133) | | (16) | % |
| | | | | | | | | | | | |
Financing costs, net | | | 86 | | | 73 | | | (13) | | (18) | % |
Other, non-operating income | | | (4) | | | (6) | | | (2) | | (33) | % |
| | | | | | | | | | | | |
Income before income taxes | | | 621 | | | 769 | | | (148) | | (19) | % |
Provision for income taxes | | | 167 | | | 237 | | | 70 | | 30 | % |
Net income | | | 454 | | | 532 | | | (78) | | (15) | % |
Less: Net income attributable to non-controlling interests | | | 11 | | | 13 | | | 2 | | 15 | % |
Net income attributable to Ingredion | | $ | 443 | | $ | 519 | | $ | (76) | | (15) | % |
Net Income attributable to weaker local currencies and a 1 percent price/product mix reduction resultingIngredion. Net income attributable to Ingredion for 2018 decreased to $443 million from the pass through$519 million in 2017. Our results for 2018 included $54 million of lower cornone-time after-tax net costs, in pricing todriven primarily by after-tax restructuring costs of $51 million. The restructuring charges consist of costs associated with our customers.
Cost of Sales.Smart Cost of sales for 2016 decreased 2 percentprogram in relation to $4.30 billion from $4.38 billion in 2015. This reduction primarily reflects the effectscessation of currency translation. Gross cornwet-milling at the Stockton, California plant, costs per ton for 2016 increased approximately 3 percent from 2015, driven by higher market prices for corn. Currency translation caused cost of sales for 2016related to decrease approximately 5 percent from 2015, reflecting the impact of the stronger US dollar. Our gross profit margin for 2016 was 25 percent, compared to 22 percent in 2015. This increase primarily reflects significantly improved gross profit margins in North America and, to a lesser extent, in Asia Pacific and EMEA.
Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses for 2016 increased to $579 million from $555 million in 2015. The increase primarily reflects higher compensation-related costs and incremental operating expenses of acquired operations. Favorable translation effects associated with the stronger US dollar partially offset these increases. Currency translation associated with weaker foreign currencies reducedCost Smart SG&A expenses for 2016 by approximately 4 percent from 2015. SG&A expenses represented 41 percent of gross profit in 2016,
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as compared to 45 percent of gross profit in 2015. The decline reflects our continued focus on cost control and gross profit growth.
Other Income-net. Other income-net of $4 million for 2016 increased from $1 million in 2015.
A summary of other income-net is as follows:
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| Year Ended |
| ||||
|
| December 31, |
| ||||
Other Income (Expense) (in millions) |
| 2016 |
| 2015 |
| ||
Gain from sale of plant |
| $ | — |
| $ | 10 |
|
Litigation settlement |
|
| — |
|
| (7) |
|
Expense associated with tax indemnification |
|
| — |
|
| (4) |
|
Other |
|
| 4 |
|
| 2 |
|
Totals |
| $ | 4 |
| $ | 1 |
|
Operating Income. A summary of operating income is shown below:
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| Favorable |
| Favorable |
| |
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| (Unfavorable) |
| (Unfavorable) |
| |
(in millions) |
| 2016 |
| 2015 |
| Variance |
| % Change |
| |||
North America |
| $ | 610 |
| $ | 479 |
| $ | 131 |
| 27 | % |
South America |
|
| 89 |
|
| 101 |
|
| (12) |
| (12) | % |
Asia Pacific |
|
| 111 |
|
| 107 |
|
| 4 |
| 4 | % |
EMEA |
|
| 106 |
|
| 93 |
|
| 13 |
| 14 | % |
Corporate expenses |
|
| (86) |
|
| (75) |
|
| (11) |
| (15) | % |
Restructuring/impairment charges |
|
| (19) |
|
| (28) |
|
| 9 |
| 32 | % |
Acquisition/integration costs |
|
| (3) |
|
| (10) |
|
| 7 |
| 70 | % |
Gain from sale of plant |
|
| — |
|
| 10 |
|
| (10) |
| NM |
|
Charge for fair value markup of acquired inventory |
|
| — |
|
| (10) |
|
| 10 |
| NM |
|
Litigation settlement |
|
| — |
|
| (7) |
|
| 7 |
| NM |
|
Operating income |
| $ | 808 |
| $ | 660 |
| $ | 148 |
| 22 | % |
Operating income for 2016 increased to $808 million from $660 million in 2015. Operating income for 2016 includes restructuring charges of $19 million consisting of $11 million ofprogram, including employee-related severance and other costs duefor restructuring projects in the South America, Asia-Pacific, and North America segments, costs related to the executionLatin America and North America Finance Transformation initiatives, and costs related to the cessation of global IT outsourcing contracts, $6our leaf extraction process in Brazil (see Note 5 of the Notes to the Consolidated Financial Statements for additional information). During the year ended December 31, 2018, we adjusted our provisional amounts related enactment of the TCJA and recognized an incremental $3 million of employee-related severancetax expense related to the TCJA.
Our results for 2017 included $47 million of one-time after-tax net costs, driven primarily by restructuring costs of $31 million. The restructuring charges consisted of costs associated with the restructuring in Argentina, charges related to the abandonment of certain assets related to our optimization initiativesleaf extraction process in Brazil, costs associated with the Finance Transformation initiative, and other pre-tax restructuring charges including employee-related severance costs in North America and South America, and $2a refinement of estimates for prior year restructuring activities (see Note 5 of the Notes to the Consolidated Financial Statements for additional information). Our after-tax net results also included a net $23 million charge to the provision for income taxes related to the enactment of the TCJA in December 2017, a $6 million charge relating to the flow-through of costs attributable to the 2015 Port Colborne plant sale. Additionally, the 2016 results include $3 million of costs associated with our integration of acquired operations. Operating income for 2015 included a $10 million gain from the sale of our Port Colborne plant, $12 million of charges for impaired assets and restructuring costs associated with our plant closings in Brazil, a restructuring charge of $12 million for estimated severance-related costs associated with the Penford acquisition, costs of $7 million relating to a litigation settlement, a $4 million restructuring charge for estimated severance-related expenses and other costsprimarily associated with the sale of the Port Colborne plant, and $10 million of other costs associated with the acquisitions and integration of the Penford and Kerr businesses. Additionally, the 2015 results included $10 million of costs associated with the sale of Penford and KerrTIC Gums inventory that was marked upadjusted to fair value at the acquisition date in accordance with business combination accounting rules. Withoutrules, and a $3 million charge associated with the restructuring / impairment charges, acquisition-related expenses, litigationintegration of acquired operations, partially offset by a tax benefit of $10 million due to a deductible foreign exchange loss resulting from the tax settlement costsbetween the U.S. and Canada and a $6 million gain from an insurance settlement primarily related to capital reconstruction.
Net sales. Net sales increased 1 percent for the plant sale, operating income for 2016 would have grown 18 percent from 2015. This increase primarily reflects operating income growth in North America and, to a lesser extent, in EMEA and Asia Pacific. Unfavorable currency translation attributable to the stronger US dollar negatively impacted operating income by approximately $17 millionyear ended December 31, 2018, as compared to 2015. Our the year ended December 31, 2017. Volume growth of 1 percent driven by specialty products and favorable price/product pricing actions helped to mitigate themix of 3 percent were offset by unfavorable impactcurrency translation of currency translation.3 percent.
32
North America operating incomeCost of sales. Cost of sales for 2018 increased 273 percent to $610$4.5 billion from $4.4 billion in 2017 primarily due to higher raw material and manufacturing expenses. Our gross profit margin was 22 percent and 24 percent for the years ended December 31, 2018, and 2017, respectively. The gross profit margin decrease primarily reflected higher raw material costs and manufacturing expenses.
Operating expenses. Our decrease in operating expenses of 1 percent for the year ended December 31, 2018, as compared to the year ended December 31, 2017, was primarily driven by lower general administrative costs, partially offset by higher selling and research and development expenses. Operating expenses, as a percentage of gross profit, were 45 percent for the year ended December 31, 2018, as compared to 42 percent for the year ended December 31, 2017.
Other income, net. Our change in other income, net for the year ended December 31, 2018, as compared to the year ended December 31, 2017, was as follows:
| | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2018 |
| 2017 |
| Variance | | |||
Insurance settlement | | $ | — | | $ | 9 | | $ | (9) | |
Value-added tax recovery | | | 5 | | | 6 | | | (1) | |
Other | | | 5 | | | 3 | | | 2 | |
Other income, net | | $ | 10 | | $ | 18 | | $ | (8) | |
Financing costs, net. Our financing costs, net for the year ended December 31, 2018 increased $13 million from $479 million in 2015. Earnings contributedthe year ended December 31, 2017, primarily driven by the acquired operations represented approximately 2 percentage points of the increase. The remaining organic operating income improvement of 25 percent for 2016 was driven principally by improved product price/mix and
29
operating efficiencies in the segment. Our North American results included business interruption insurance recoveries of $7 million in both 2016 and 2015 relating to the reimbursement of costs in those years. Translation effects associated with a weaker Canadian dollar negatively impacted operating income by approximately $4 million in the segment. South America operating income decreased 12 percent to $89 million from $101 million in 2015. The decrease reflects lower earnings in the Southern Cone region of South America, which more than offset earnings growth in the rest of the segment. Improved product selling prices were not enough to offset higher local production costs, reduced volume attributable to the difficult macroeconomic environment (particularly in the Southern Cone) and unfavorable impacts of currency devaluations. Translation effects associated with weaker South American currencies (particularly the Colombian Peso and Brazilian Real) negatively impacted operating income by approximately $6 million. We anticipate that our business in South America will continue to be challenged by difficult economic conditions and we continue to assess various strategic options to better optimize our business and improve performance in South America. Implementation of certain of these options could result in future asset impairment charges in the segment. Asia Pacific operating income increased 4 percent to $111 million from $107 million in 2015. Volume growth and good cost control more than offsettranslation, including the impact of reduced product selling priceshighly inflationary accounting related to Argentina.
Provision for income taxes. Our effective income tax rates for the years ended December 31, 2018 and local currency weakness2017 were 26.9 percent and 30.8 percent, respectively.
The TCJA introduced numerous changes in the segment. Translation effects associated with weaker Asia Pacific currencies negatively impacted operating income by approximately $3 million in the segment. EMEA operating income grew 14 percent to $106 million from $93 million in 2015. The increase was driven by volume growth and lower raw material and energy costs, which more than offset theU.S. federal tax laws. Changes that have a significant impact of local currency weakness in the segment. Translation effects primarily associated with the weaker British Pound Sterling and Pakistan Rupee had an unfavorable impact of approximately $4 million on operating income in the segment. An increase in corporate expenses primarily reflects increased variable compensation and continued investments in our administrative processes.
Financing Costs-net. Financing costs-net increased to $66 million in 2016 from $61 million in 2015. The increase primarily reflects reduced interest income due to lower average cash balances and short-term investment rates and an increase in interest expense driven by higher weighted average borrowing costs that more than offset the impact of reduced average debt balances. A decline in foreign currency transaction losses partially offset these increases.
Provision for Income Taxes. Our effective tax rate are a reduction in the U.S. corporate tax rate from 35 percent to 21 percent, the imposition of a U.S. tax on our global intangible low-taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) deduction. The TCJA also provided for a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017, and eliminated the tax on dividends from our foreign subsidiaries by allowing a 100-percent dividends received deduction.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was 33.1 percentissued to provide guidance on the application of GAAP to situations in 2016,which the registrant does not have all the necessary information available, prepared or analyzed (including computations) in sufficient detail to complete the accounting for the income tax effects of the TCJA.
In the fourth quarter of 2017, we calculated a provisional impact of the TCJA in accordance with SAB 118 and our understanding of the TCJA, including published guidance as comparedof December 31, 2017. During the third and fourth quarter of 2018, we recorded $2 million and $1 million, respectively, of net incremental tax expense as we finalized our TCJA expense based on additional guidance from federal and state regulatory agencies. (See Note 9 of the Notes to 31.2 percent in 2015. the Consolidated Financial Statements for additional information.) The following table summarizes the provisional and final net tax expense impact of the TCJA:
| | | | | | | |
| | Provisional 2017 | | Final 2017 | | ||
(in millions) |
| TCJA Impact | | TCJA Impact | | ||
One-time transition tax | | $ | 21 | | $ | 25 | |
Remeasurement of deferred tax assets and liabilities | | | (38) | | | (38) | |
Net impact of provision for taxes on unremitted earnings | | | 33 | | | 35 | |
Other items, net | | | 7 | | | 4 | |
Net impact of the TCJA | | $ | 23 | | $ | 26 | |
We have
33
Additionally, we had been pursingpursuing relief from double taxation under the US and CanadianU.S.-Canada tax treaty for the years 2004-2013. During2004 through 2013. In the 4ththird quarter of 2016,2017, the two countries finalized the agreement, which eliminated the double taxation, and we paid $63 million to the U.S. Internal Revenue Service to settle the liability. As a tentativeresult of that agreement, was reached between the US and Canada for the specific issues being contested. We establishedwe were entitled to a net reservetax benefit of $24$10 million primarily due to a foreign exchange loss deduction on our 2017 U.S. federal income tax return, or 1.3 percentage points on the effective tax rate. As a result of the final settlement, we received refunds totaling $42 million from Canadian revenue agencies and recorded $2 million, or 3.20.3 percentage points on the effective tax rate, of interest through tax expense in 2016.2018.
We use the U.S. dollar as the functional currency for our subsidiaries in Mexico. In addition, as2017, a resultdecline in value of the settlement,Mexican peso versus the U.S. dollar increased tax expense by $4 million or 0.5 percentage points on the effective tax rate. This impact was largely associated with foreign currency translation gains and losses for local tax purposes on net-U.S.-dollar-monetary assets held in Mexico for which there was no corresponding gain or loss in pre-tax income.
During 2018, we increased the years 2014-2016, we have established avaluation allowance on the net reserve for $7deferred tax assets in Argentina by $6 million, or 1.0 percentage points on the effective tax rate, in 2016. Of this amount, $4 million pertainscompared to 2016.
We use the US dollar as the functional currency for our subsidiaries in Mexico. Because of the continued decline in the value of the Mexican peso versus the US dollar, our tax provision for 2016 and 2015 was increased by $18$16 million, or 2.4 percentage points and $17 million, or 2.9 percentage points, respectively. A primary cause was foreign currency translation gains for local income tax purposes on net US dollar monetary assets held in Mexico for which there is no corresponding gain in our pre-tax income.
During 2016 we recorded a valuation allowance on the net deferred tax assets of a foreign subsidiary in the amount of $7 million or 1.02.0 percentage points on the effective tax rate in 2016. In addition, we accrued taxes on unremitted earnings of foreign subsidiaries in the amount of $3.7 million or 0.5 percentage points on the effective rate in 2016.2017.
The above items were partially offset in 2016 by $2 million, or 0.3 percentage points of net favorable reversals of previously unrecognized tax benefits. In addition, foreign tax credits increased in the amount of $22 million or 3.0 percentage points. Finally, in the second quarter of 2016, we elected to early adopt ASU No. 2016-09, related to stock compensation. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the provision for income taxes when stock options are exercised or restricted shares and performance shares vest. Our 2016 tax provision includes a tax benefit of $12 million, or 1.6 percentage points, related to the adoption of this standard.
Based on the final settlement of an audit matter, in 2015 we reversed $4 million of the $7 million income tax expense and other income that was recorded in 2014. As a result, our effective income tax rate for 2015 was reduced by 0.7
30
percentage points. Substantial portions of the sale of Port Colborne, Canada, assets resulted in favorable tax treatment that reduced the effective tax rate by approximately 0.4 percentage points. Additionally, the 2015 tax provision includes $2 million of net favorable reversals of previously unrecognized tax benefits due to the lapsing of the statute of limitations, which reduced the effective tax rate by 0.3 percentage points.
Without the impact of the items described above, our effective tax rates for 2016 and 2015rate would have been approximately 3025.1 percent and 29.728.1 percent for 2018 and 2017, respectively.
We have significant operationsThe remaining year-over-year decrease in the US, Canada, Mexico and Pakistan where the statutory tax rates, including localeffective income taxes are approximately 37 percent, 25 percent, 30 percent and 31 percent in 2016, respectively. In addition, our subsidiary in Brazil has a statutory tax rate is primarily attributable to the impact of 34 percent, before local incentives that vary each year.U.S. tax reform.
Net Income Attributableincome attributable to Non-controlling Interestsnon-controlling interests. Net income attributable to non-controlling interests was $11for the year ended December 31, 2018, decreased $2 million in 2016, up from $10 million in 2015. The increasethe year ended December 31, 2017, primarily reflects improved net incomedue to unfavorable currency translation at our non-wholly-owned operation in Pakistan.
Comprehensive Income2018 Compared to 2017 – North America
| | | | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage | | |||
Net sales to unaffiliated customers | | $ | 3,857 | | $ | 3,843 | | $ | 14 | | — | % |
Operating income | | | 545 | | | 654 | | | (109) | | (17) | % |
Net sales. We recorded comprehensive income of $505 million in 2016, as compared with $82 million in 2015. The increase in comprehensive income primarily reflects a $331 million favorable variance inNet sales remained relatively flat for the foreign currency translation adjustment and our net income growth. The favorable variance in the foreign currency translation adjustment reflects a moderate strengthening in end of period foreign currencies relative to the US dollar,year ended December 31, 2018, as compared to the year-ago period when endyear ended December 31, 2017. Volume growth for specialty and Mexico was primarily offset by volume declines for sweeteners in the U.S. and Canada.
Operating income. Our decrease in operating income of period foreign currencies had substantially weakened. $109 million for the year ended December 31, 2018, as compared to the year ended December 31, 2017, was driven by higher production and supply chain costs, lower sweetener demand in the U.S. and Canada, and commodity margin pressures.
20152018 Compared to 20142017 – South America
| | | | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage | | |||
Net sales to unaffiliated customers | | $ | 988 | | $ | 1,052 | | $ | (64) | | (6) | % |
Operating income | | | 99 | | | 81 | | | 18 | | 22 | % |
Net Income attributable to Ingredionsales. Net sales remained relatively flat for the year ended December 31, 2018, as compared to the year ended December 31, 2017. The decrease was driven by currency devaluations of 19% in Argentina and Brazil, partly offset by a 13% increase in price/product mix from price increases used to offset higher raw material costs and foreign currency fluctuations.
Operating income. Our increase in operating income attributableof $18 million for the year ended December 31, 2018, as compared to Ingredionthe year ended December 31, 2017, was primarily driven by improved operational efficiencies and the lapping
34
of the 2017 Argentina manufacturing optimization project, partially offset by unfavorable currency translation reflecting a weaker Brazilian real and Argentine peso.
2018 Compared to 2017 – Asia-Pacific
| | | | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage | | |||
Net sales to unaffiliated customers | | $ | 837 | | $ | 772 | | $ | 65 | | 8 | % |
Operating income | | | 104 | | | 115 | | | (11) | | (10) | % |
Net sales. Our increase in net sales of 8 percent for 2015 increasedthe year ended December 31, 2018, as compared to $402 million, or $5.51 per diluted common share, from $355 million, or $4.74 per diluted common sharethe year ended December 31, 2017, was driven by volume growth of 3 percent, favorable currency translation of 3 percent, and a 2 percent increase in 2014.price/product mix due to favorable pricing to offset higher tapioca costs.
Operating income. Our results for 2015 include after-tax chargesdecrease in operating income of $11 million ($0.15 per diluted common share) for impaired assets and restructuring costs in Brazil and Canada, after-tax restructuring charges of $7 million ($0.10 per diluted common share) for employee severance-related costs associated with the Penford acquisition, after-tax costs of $7 million ($0.10 per diluted common share) associated with the acquisition and integration of both Penford and Kerr, after-tax costs of $6 million ($0.09 per diluted common share) relating to the sale of Penford and Kerr inventory that was adjusted to fair value at the respective acquisition dates in accordance with business combination accounting rules, after-tax costs of $4 million ($0.06 per diluted common share) relating to a litigation settlement and an after-tax gain of $9 million ($0.12 per diluted common share) from the sale of our Port Colborne plant. Our results for 2014 include an impairment charge of $33 million ($0.44 per diluted common share) to write-off goodwill at our Southern Cone of South America reporting unit (see Note 5 of the notes to the consolidated financial statements for additional information) and after-tax costs of $2 million ($0.02 per diluted common share) related to our then-pending acquisition of Penford. Without the gain from the plant sale, the litigation settlement costs and the impairment, restructuring and acquisition-related charges, our net income and diluted earnings per share would have grown 10 percent and 13 percent, respectively, from 2014. These increases primarily reflect significantly improved operating income in North America for 2015,year ended December 31, 2018, as compared to 2014.the year ended December 31, 2017, was driven by a delay in the pass-through of higher tapioca costs, partially offset by specialty volume growth.
2018 Compared to 2017 – EMEA
| | | | | | | | | | | | |
| | Year Ended December 31, | | Favorable (Unfavorable) | | Favorable (Unfavorable) | | |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage | | |||
Net sales to unaffiliated customers | | $ | 607 | | $ | 577 | | $ | 30 | | 5 | % |
Operating income | | | 116 | | | 114 | | | 2 | | 2 | % |
Net sales. Our improved diluted earnings per common share for 2015 also reflects the favorable impact of our share repurchases.
Net Sales. Net sales for 2015 decreased to $5.62 billion from $5.67 billion in 2014.
A summary of net sales by reportable business segment is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Increase |
|
|
| |
(in millions) |
| 2015 |
| 2014 |
| (Decrease) |
| % Change |
| |||
North America |
| $ | 3,345 |
| $ | 3,093 |
| $ | 252 |
| 8 | % |
South America |
|
| 1,013 |
|
| 1,203 |
|
| (190) |
| (16) | % |
Asia Pacific |
|
| 733 |
|
| 794 |
|
| (61) |
| (8) | % |
EMEA |
|
| 530 |
|
| 578 |
|
| (48) |
| (8) | % |
Total |
| $ | 5,621 |
| $ | 5,668 |
| $ | (47) |
| (1) | % |
31
The businesses acquired from Penford and Kerr contributed $328 million of net sales in 2015. The decreaseincrease in net sales primarily reflectsof 5 percent for the year ended December 31, 2018, as compared to the year ended December 31, 2017, was driven by volume growth of 6 percent, a 3 percent increase in price/product mix, partially offset by unfavorable currency translation of 9 percent due4 percent.
Operating income. Our increase in operating income of $2 million for the year ended December 31, 2018, as compared to the stronger US dollar, which more than offsetyear ended December 31, 2017, was driven by specialty and core volume growth of 7 percent that was driven mainly by the operations of the acquired businesses and improved price/product mix, improvement of 1 percent. The pass through of lower raw material costs (primarily corn) in our product pricing is reflected in the modest price/product mix improvement. Of the 7 percent volume increase, 1 percent represented organic volume growth.
Net sales in North America increased 8 percent, primarily reflecting volume growth of 12 percent driven largelypartly offset by the addition of the acquired businesses, which more than offset a 2 percent price/product mix decline driven principally by lower raw material costs and unfavorable currency translation of 2 percent attributable to a weaker Canadian dollar. Organic volume grew 1 percent. Net sales in South America declined 16 percent, as a 26 percent decline attributable to weaker foreign currencies more than offset price/product mix improvement of 10 percent. Volume in the segment was flat. Asia Pacific net sales decreased 8 percent, as unfavorable currency translation of 7 percentPakistan and a 3 percent price/product mix decline, more than offset volume growth of 2 percent. EMEA net sales fell 8 percent, reflecting unfavorable currency translation of 9 percent, primarily attributable to the weaker Euro and British Pound Sterling. Volume grew 1 percent. Price/product mix in the segment was flat.
Cost of Sales. Cost of sales for 2015 decreased 4 percent to $4.38 billion from $4.55 billion in 2014. This reduction primarily reflects lowerhigher raw material costscosts.
Liquidity and the effects of currency translation. Gross corn costs per ton for 2015 decreased approximately 13 percent from 2014, driven by lower market prices for corn. Currency translation caused cost of sales for 2015 to decrease approximately 10 percent from 2014, reflecting the impact of the stronger US dollar. Our gross profit margin for 2015 was 22 percent, compared to 20 percent in 2014. Despite reduced selling prices driven by lower corn costs, we have generally maintained per unit gross profit levels in US dollars, resulting in the improved gross profit margin percentages.Capital Resources
Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses for 2015 increased to $555 million from $525 million in 2014. The increase primarily reflects incremental operating expenses of the acquired businesses as well as other costs associated with the acquisition and integration of those businesses. Favorable translation effects associated with the stronger US dollar more than offset higher compensation-related and various other costs. Currency translation associated with weaker foreign currencies reduced SG&A expenses for 2015 by approximately 8 percent from 2014. SG&A expenses represented 45 percent of gross profit in 2015, as compared to 47 percent of gross profit in 2014.
Other Income-net. Other income-net of $1 million for 2015 decreased from other income-net of $24 million in 2014. The decrease for 2015 primarily reflects $7 million of costs relating to a litigation settlement and an $11 million unfavorable swing from $7 million of income in 2014 to $4 million of expense in 2015 associated with a tax indemnification agreement relating to a subsidiary acquired from Akzo Nobel N.V. (“Akzo”) in 2010. In 2014, we recognized a charge to our income tax provision for an expected unfavorable income tax audit result at this subsidiary related to a pre-acquisition period for which we are indemnified by Akzo. The costs incurred by the acquired subsidiary were recorded in our provision for income taxes while the reimbursement from Akzo under the indemnification agreement was recorded as other income. In 2015, based upon the final settlement of the matter, we determined that the unfavorable income tax audit amount should be reduced from $7 million to $3 million. Accordingly, in 2015, we recognized a $4 million income tax benefit and a charge to other income-net of $4 million to reduce our receivable from Akzo associated with the indemnification agreement. The impact on our net income for 2015 and 2014 is zero. Other income-net for 2015 also included a $10 million gain from the sale of the Port Colborne plant.
32
A summary of other income-net is as follows:
|
|
|
|
|
|
|
|
|
| Year Ended |
| ||||
|
| December 31, |
| ||||
Other Income (Expense) (in millions) |
| 2015 |
| 2014 |
| ||
|
|
|
|
|
|
|
|
Gain from sale of plant |
| $ | 10 |
| $ | — |
|
Litigation settlement |
|
| (7) |
|
| — |
|
Income (expense) associated with tax indemnification |
|
| (4) |
|
| 7 |
|
Gain from sale of investment |
|
| — |
|
| 5 |
|
Gain from sale of idled plant |
|
| — |
|
| 3 |
|
Other |
|
| 2 |
|
| 9 |
|
Totals |
| $ | 1 |
| $ | 24 |
|
Operating Income. A summary of operating income is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Favorable |
| Favorable |
| |
|
|
|
|
|
|
|
| (Unfavorable) |
| (Unfavorable) |
| |
(in millions) |
| 2015 |
| 2014 |
| Variance |
| % Change |
| |||
North America |
| $ | 479 |
| $ | 375 |
| $ | 104 |
| 28 | % |
South America |
|
| 101 |
|
| 108 |
|
| (7) |
| (6) | % |
Asia Pacific |
|
| 107 |
|
| 103 |
|
| 4 |
| 4 | % |
EMEA |
|
| 93 |
|
| 95 |
|
| (2) |
| (2) | % |
Corporate expenses |
|
| (75) |
|
| (65) |
|
| (10) |
| (15) | % |
Impairment/restructuring charges |
|
| (28) |
|
| (33) |
|
| 5 |
| 15 | % |
Gain from sale of plant |
|
| 10 |
|
| — |
|
| 10 |
| NM |
|
Acquisition/integration costs |
|
| (10) |
|
| (2) |
|
| (8) |
| NM |
|
Charge for fair value markup of acquired inventory |
|
| (10) |
|
| — |
|
| (10) |
| NM |
|
Litigation settlement |
|
| (7) |
|
| — |
|
| (7) |
| NM |
|
Operating income |
| $ | 660 |
| $ | 581 |
| $ | 79 |
| 14 | % |
Operating income for 2015 increased to $660 million from $581 million in 2014. Operating income for 2015 included a $10 million gain from the sale of our Port Colborne plant, $12 million of charges for impaired assets and restructuring costs associated with our plant closings in Brazil, a restructuring charge of $12 million for estimated severance-related costs associated with the Penford acquisition, costs of $7 million relating to a litigation settlement, a $4 million restructuring charge for estimated severance-related expenses and other costs associated with the sale of the Port Colborne plant, and $10 million of other costs associated with the acquisitions and integration of the Penford and Kerr businesses. Additionally, the 2015 results included $10 million of costs associated with the sale of Penford and Kerr inventory that was marked up to fair value at the acquisition date in accordance with business combination accounting rules. Operating income for 2014 included a $33 million charge to write-off impaired goodwill at our Southern Cone of South America reporting unit and $2 million of costs associated with our then-pending acquisition of Penford. Without the gain from the plant sale, the litigation settlement costs and the restructuring, impairment and acquisition-related charges, operating income for 2015 would have grown 14 percent from 2014. This increase primarily reflects significantly improved operating income in North America compared to the weaker results of 2014. Unfavorable currency translation attributable to the stronger US dollar negatively impacted operating income by approximately $68 million as compared to 2014. Our product pricing actions helped to mitigate the unfavorable impact of currency translation.
North America operating income increased 28 percent to $479 million from $375 million in 2014. Earnings contributed by the acquired operations represented approximately 6 percentage points of the increase. The remaining organic operating income improvement of 22 percent for 2015 primarily reflects more normal weather conditions, organic volume growth and lower corn, energy and other manufacturing costs. Our North American results for 2015 also included $7 million of business interruption insurance recoveries related to the prior year’s weather. Our 2014 results
33
were negatively impacted by harsh winter weather conditions that caused high energy, transportation and production costs. Translation effects associated with a weaker Canadian dollar unfavorably impacted operating income by approximately $13 million in the segment. South America operating income decreased 6 percent to $101 million from $108 million in 2014. The decline primarily reflects weaker results in Brazil driven principally by local currency weakness. Improved selling prices for our products helped to partially offset the unfavorable impacts of currency devaluation and higher local production costs in the segment. Translation effects associated with weaker South American currencies (particularly the Brazilian Real, Colombian Peso and the Argentine Peso) negatively impacted operating income by approximately $36 million. We currently anticipate that our business in South America will continue to be challenged by difficult economic conditions in 2016. Asia Pacific operating income grew 4 percent to $107 million from $103 million in 2014. Volume growth and lower raw material costs helped to mitigate the impact of local currency weakness in the segment. Translation effects associated with weaker Asia Pacific currencies negatively impacted operating income by approximately $9 million in the segment. EMEA operating income declined 2 percent to $93 million from $95 million in 2014. This decrease primarily reflects the impact of currency translation. Cost reductions and improved sales volumes helped to partially offset this unfavorable impact. Additionally, the prior year results included a $3 million gain from the sale of an idled plant in Kenya. Translation effects primarily associated with the weaker Euro and British Pound Sterling had an unfavorable impact of $10 million on operating income in the segment. An increase in corporate expenses was driven by an adjustment with respect to the previously-mentioned Akzo tax indemnification that unfavorably impacted operating income by $11 million for 2015, as compared to 2014.
Financing Costs-net. Financing costs-net was $61 million in 2015, consistent with 2014. Lower interest expense and higher interest income were offset by a $5 million increase in foreign currency transaction losses. The reduction in interest expense reflects lower average interest rates driven by the effect of our interest rate swaps and our low-rate term loan borrowing that we arranged in 2015, which more than offset the impact of higher average borrowings. The increase in interest income was driven primarily by higher average cash balances. The increase in foreign currency transaction losses primarily reflects the impact of the December devaluation of the Argentine peso. Hedge costs spiked in December and prevented hedges from offsetting the impact of the devaluation, negatively affecting Argentine peso denominated assets.
Provision for Income Taxes. Our effective tax rate was 31.2 percent in 2015, as compared to 30.2 percent in 2014. We use the US dollar as the functional currency for our subsidiaries in Mexico. Because of the continued decline in the value of the Mexican peso versus the US dollar, our tax provision for 2015 was increased by $17 million, or 2.9 percentage points. A primary cause was associated with foreign currency transaction gains for local income tax purposes on net US dollar monetary assets held in Mexico for which there is no corresponding gain in our pre-tax income. Based on the final settlement of an audit matter, in 2015 we reversed $4 million of the $7 million income tax expense and other income that was recorded in 2014 (see also discussion of Other Income-net presented earlier in this section). As a result, our effective income tax rate for 2015 was reduced by 0.7 percentage points. Substantial portions of the sale of Port Colborne, Canada, assets resulted in favorable tax treatment that reduced the effective tax rate by approximately 0.4 percentage points. Additionally, the 2015 tax provision included $2 million of net favorable reversals of previously unrecognized tax benefits due to the lapsing of the statute of limitations, which reduced the effective tax rate by 0.3 percentage points.
In the fourth quarter of 2014 we determined that goodwill in our Southern Cone subsidiaries was impaired and recorded a charge of $33 million without a tax benefit, which increased the 2014 effective tax rate by 1.8 percentage points. We use the US dollar as the functional currency for our subsidiaries in Mexico. Because of the decline in the value of the Mexican peso versus the US dollar, primarily late in 2014, the Mexican tax provision was increased by approximately $7 million, or 1.3 percentage points in our effective tax rate, primarily associated with foreign currency transaction gains for local income tax purposes on net US dollar monetary assets held in Mexico for which there is no corresponding gain in our pre-tax income. The tax provision also includes approximately $7 million for an unfavorable audit result at a National Starch subsidiary related to a pre-acquisition period for which we are indemnified by Akzo. Additionally, the 2014 tax provision includes $12 million of net favorable reversals of previously unrecognized tax benefits due to the lapsing of the statute of limitations.
34
Without the impact of the items described above, our effective tax rates for 2015 and 2014 would have been approximately 29.7 percent and 28.1 percent, respectively. See Note 9 of the notes to the consolidated financial statements for additional information.
We have significant operations in the US, Canada, Mexico and Thailand where the statutory tax rates, including local income taxes are approximately 37 percent, 25 percent, 30 percent and 20 percent in 2015, respectively. In addition, our subsidiary in Brazil has a statutory tax rate of 34 percent, before local incentives that vary each year.
Net Income Attributable to Non-controlling Interests. Net income attributable to non-controlling interests was $10 million in 2015, up from $8 million in 2014. The increase primarily reflects improved net income at our non-wholly-owned operation in Pakistan.
Comprehensive Income. We recorded comprehensive income of $82 million in 2015, as compared with $156 million in 2014. The decrease in comprehensive income primarily reflects a $112 million unfavorable variance in the currency translation adjustment, which more than offset our net income growth. The unfavorable variance in the currency translation adjustment reflects a greater weakening in end of period foreign currencies relative to the US dollar, as compared to a year ago.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2016,2019, our total assets were $5.78$6.0 billion, as compared to $5.07$5.7 billion at December 31, 2015.2018. The increase was driven principally by our net incomecontinued capital investment in growth and the impact of the TIC Gums acquisition.platforms. Total equity increased to $2.60$2.7 billion at December 31, 2016,2019, from $2.18$2.4 billion at December 31, 2015.2018. This increase primarily reflects our earnings growthcurrent year earnings.
On April 12, 2019, we amended and restated the Term Loan Credit Agreement that was set to mature on April 25, 2019 (“Term Loan”) of $165 million to establish a 24-month senior unsecured term loan credit facility in an amount up to $500 million that matures on April 12, 2021. We used the $500 million of borrowings under the new facility to pay down the amounts outstanding under our revolving credit facility described below and to pay off the Term Loan balance.
All borrowings under the amended term loan credit agreement for the new facility (“Amended Term Loan Credit Agreement”) will bear interest at a lesser extent,variable annual rate based on the issuanceLondon Interbank Offered Rate (“LIBOR”) or a base rate, at our election, subject to the terms and conditions thereof, plus, in each case, an applicable margin. We are required to pay a fee on the unused availability under the Amended Term Loan Credit Agreement. The Amended Term Loan Credit Agreement contains customary representations, warranties, covenants and events of common stock associateddefault, including covenants restricting the incurrence of liens, the incurrence of indebtedness by our subsidiaries and certain fundamental changes involving the Company and our subsidiaries, subject to certain exceptions in each case. We must also maintain a specified consolidated leverage ratio and consolidated interest coverage ratio. As of December 31, 2019, we were in compliance with these financial covenants. The occurrence of an event of default under the exerciseAmended Term Loan Credit Agreement could result in all loans and other obligations being declared due and payable and the term loan credit facility being terminated.
35
On October 11, 2016, we entered into a new five-year, senior, unsecured $1 billion revolving credit agreement (the “Revolving Credit Agreement”) that replaced our previously existing $1 billion senior unsecured revolving credit facility that would have matured on October 22, 2017. See also Note 7 of the Notes to the Consolidated Financial Statements. facility.
Subject to certain terms and conditions, the Companywe may increase the amount of the revolving credit facility under the Revolving Credit Agreement by up to $500 million in the aggregate. The CompanyWe may also obtain up to two one-year extensions of the maturity date of the Revolving Credit Agreement at its requestsour request and subject to the agreement of theour lenders. All committed pro rata borrowings under the revolving credit facility will bear interest at a variable annual rate based on either the LIBOR or base rate, at the Company’sour election, subject to the terms and conditions thereof, plus, in each case, an applicable margin based on the Company’sour leverage ratio (as reported in the financial statements delivered pursuant to the Revolving Credit Agreement) or the Company’sour credit rating. Subject to specified conditions, the Companywe may designate one or more of itsour subsidiaries as additional borrowers under the Revolving Credit Agreement provided that the Company guaranteeswe guarantee all borrowings and other obligations of any such subsidiaries thereunder.
The Revolving Credit Agreement contains customary representations, warranties, covenants, events of default and other terms and conditions, including limitations oncovenants restricting liens, incurrence of subsidiary debt and mergers. The Companymergers, subject to certain exceptions in each case. We must also comply with a leverage ratio covenant and an interest coverage ratio covenant. As of December 31, 2019, we were in compliance with these financial covenants. The occurrence of an event of default under the Revolving Credit Agreement could result in all loans and other obligations under the agreement being declared due and payable and the revolving credit facility being terminated. We met all covenant requirements asAs of December 31, 2016. At December 31, 2016,2019, there were no$10 million in borrowings outstanding under ourthe Revolving Credit Agreement, with an additional $990 million available for use under the Revolving Credit Agreement as comparedof the end of the year. In addition to $111 million outstanding at December 31, 2015 under our previously-existing $1 billion revolvingthe credit facility. In addition,facilities described above, we have a number of short-term credit facilities consisting of operating lines of credit outside of the United States.U.S.
On September 22, 2016, we issued 3.20 percent Senior Notes due October 1, 2026 in an aggregate principal amountAs of $500 million. The net proceeds from the sale of the notes of approximately $497 million were used to repay $350 million of term loan debt, to repay $52 million of borrowings under our previously existing $1 billion revolving credit facility and for general corporate purposes. See also Note 7 of the Notes to the Consolidated financial statements.
35
On July 10, 2015, we entered into a Term Loan Credit Agreement to establish an 18-month, $350 million multi-currency senior unsecured term loan credit facility. All borrowings under the term loan facility incurred interest at a variable annual rate based on the LIBOR or base rate, at our election, subject to the terms and conditions thereof, plus, in each case, an applicable margin. Proceeds of $350 million from the Term Loan Credit Agreement were used to repay borrowings outstanding under our previously-existing $1 billion revolving credit facility. The $350 million of term loan borrowings were repaid in September 2016 with proceeds from our 3.20 percent Senior Notes offering discussed above.
On November 2, 2015, we repaid our $350 million of 3.2 percent senior notes at the maturity date with proceeds from our previously-existing $1 billion revolving credit facility and cash on hand.
At December 31, 2016,2019, we had total debt outstanding of $1.96 billion, compared to $1.84 billion at$1.8 billion. As of December 31, 2015. At December 31, 20162019, our total debt consisted of the following:
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(in millions) |
| |
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3.2% senior notes due October 1, 2026 |
| $ | 497 | |
4.625% senior notes due November 1, 2020 | | | 400 | |
6.625% senior notes due April 15, 2037 | | | 253 | |
5.62% senior notes due March 25, 2020 | | | 200 | |
Term loan credit agreement due April 12, 2021 | | | 405 | |
Revolving credit facility | | | 10 | |
Fair value adjustment related to hedged fixed rate debt instruments | | | 1 | |
Long-term debt | | | 1,766 | |
Short-term borrowings | | | 82 | |
Total debt | | $ | 1,848 | |
As noted above, we have $200 million of 6.0 percent Senior Notes that mature on April 15, 2017 and $300 million (face amount) of 1.8 percent Senior Notes that mature on September 25, 2017. These borrowings are included inThe Company’s long-term debt matures as follows: $600 million in our Consolidated Balance Sheet2020, $500 million in 2026, and $250 million in 2037. The Company’s Term Loan of $405 million matures in 2021. The Company’s long-term debt as we haveof December 31, 2019 includes the 5.62% senior notes due March 25, 2020 and 4.625% senior notes due November 1, 2020. The Company has the ability and intent to refinance themsuch senior notes on a long-term basis using the revolving credit facility or other sources prior to the maturity dates.date.
Ingredion Incorporated,We, as the parent company, guaranteesguarantee certain obligations of itsour consolidated subsidiaries. AtAs of December 31, 2016,2019, such guarantees aggregated $121$57 million. Management believesWe believe that such consolidated subsidiaries will meet their financial obligations as they become due.
Historically, the principal source of our liquidity has been our internally generated cash flow, which we supplement as necessary with our ability to borrow onunder our bank linescredit facilities and to raise funds in the capital markets. In addition to borrowing availability under our Revolving Credit Agreement, we also have approximately $443$585 million of unused operating lines of credit in the various foreign countries in which we operate.
36
The weighted average interest rate on our total indebtedness was approximately 4.04.3 percent and 3.44.8 percent for 20162019 and 2015,2018, respectively.
36
Net Cash Flows
A summary of operating cash flows for 2019, 2018, and 2017 is shown below:
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| ||||||||||
| | | | | | | | | | | ||||||
(in millions) |
| 2016 |
| 2015 |
| 2019 |
| 2018 |
| 2017 | | |||||
Net income |
| $ | 496 |
| $ | 412 | | $ | 424 | | $ | 454 | | $ | 532 | |
Depreciation and amortization |
|
| 196 |
|
| 194 | | | 220 | |
| 247 | |
| 209 | |
Write-off of impaired assets |
|
| — |
|
| 10 | ||||||||||
Mechanical stores expense | | | 57 | | | 57 | | | 57 | | ||||||
Charge for fair value mark-up of acquired inventory |
|
| — |
|
| 10 | | | — | |
| — | |
| 9 | |
Gain on sale of plant |
|
| — |
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| (10) | ||||||||||
Deferred income taxes |
|
| (5) |
|
| (6) | | | 3 | |
| (23) | |
| 67 | |
Changes in working capital |
|
| (8) |
|
| (24) | | | (54) | |
| (118) | |
| (121) | |
Other |
|
| 92 |
|
| 100 | | | 30 | |
| 86 | |
| 16 | |
Cash provided by operations |
| $ | 771 |
| $ | 686 | | $ | 680 | | $ | 703 | | $ | 769 | |
Cash provided by operations was $771$680 million in 2016,2019, as compared with $686$703 million in 2015.2018. The increasedecrease in operating cash flow2019 was primarily reflects ourdue to lower current year net earnings versus the prior year. Cash provided by operations in 2018 decreased compared to 2017 primarily due to lower net earnings in 2018 and the change in deferred income growth.tax provision.
To manage price risk related to corn purchases, in North America, we use derivative instruments, (cornconsisting of corn futures and options contracts)contracts, to lock in our corn costs associated with firm-priced customer sales contracts. We are unable to directly hedge price risk related to co-product sales; however, we occasionally enter into hedges of soybean oil (a competing product to our animal feed and corn oil) in order to mitigate the price risk of animal feed and corn oil sales. Additionally, we enter into futures contracts to hedge price risk associated with fluctuations in market prices of ethanol. As the market price of these commodities fluctuate, our derivative instruments change in value and we fund any unrealized losses or receive cash for any unrealized gains related to outstanding commodity futures and option contracts. We plan to continue to use derivative instruments to hedge such price risk and, accordingly, we will be required to make cash deposits to or be entitled to receive cash from our margin accounts depending on the movement in the market price of the underlying commodity.commodities.
Listed below are our primary investing and financing activities for 2016:2019, 2018, and 2017:
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(in millions) | | 2019 |
| 2018 | | 2017 | | |||
Capital expenditures and mechanical stores purchases | | $ | (328) | | $ | (350) | | $ | (314) | |
Payments for acquisitions, net of cash acquired | | | (42) | |
| — | |
| (17) | |
Payments on debt | | | (1,465) | |
| (738) | |
| (1,240) | |
Proceeds from borrowings | | | 1,209 | |
| 987 | |
| 1,144 | |
Dividends paid (including to non-controlling interests) | | | (174) | |
| (182) | |
| (165) | |
Repurchases of common stock | | | 63 | |
| (657) | |
| (123) | |
On December 9, 2016,27, 2019, our board of directors declared a quarterly cash dividend of $0.50$0.63 per share of common stock. This dividend was paid on January 25, 201727, 2020, to stockholders of record at the close of business on December 31, 2016.January 2, 2020.
We currently anticipate thatpaid $328 million of capital expenditures and mechanical stores purchases to update, expand and improve our facilities in 2019. In April 2019, we acquired Western Polymer for 2017 will approximate $300 million to $325$42 million.
On December 29, 2016, we acquired TIC Gums, a US-based company that provides advanced texture systemsWe paid $657 million during 2018 to the food and beverage industry. Consistent with our Strategic Blueprint for growth, this acquisition enhances our texture capabilities and formulation expertise and provides additional opportunities for us to provide solutions for natural, organic and clean-label demandsrepurchase common stock. We purchased 1.8 million shares of our customers. TIC Gums utilizescommon stock in open market transactions for $202 million during the second, third and fourth quarters of 2018. Additionally on November 5, 2018, we entered into a varietyVariable Timing Accelerated Share Repurchase (“ASR”) program with JPMorgan (“JPM”). Under the ASR program, we paid $455 million on November 5, 2018 and acquired 4 million shares of agriculturally derived ingredients, suchour common stock having an approximate value of $423 million on that date. On February 5, 2019, we settled the difference between the initial price and average daily volume-weighted average price (“VWAP”) less the agreed upon discount during the term of the agreement. The final VWAP was $98.04 per share, which was less than originally paid. We settled the difference in cash, resulting in JPM returning $63 million of the upfront payment to us on February 6, 2019 as acacia guman inflow to cash from financing activities, and guar gum,lowering the total cost of repurchasing the 4 million shares of common stock to form the foundation for innovative texture systems and allow for clean-label reformulation. TIC Gums operates two production facilities, one in Belcamp, Maryland and one in Guangzhou, China. TIC Gums also maintains an R&D lab in each of these facilities. We funded the $395 million acquisition with cash and short-term borrowings.$392 million.
37
We currently expect that our available cash balances, future cash flow from operations, access to debt markets, and borrowing capacity under our credit facilities will provide us with sufficient liquidity to fund our anticipated capital expenditures, dividends and other investing and/or financing activities for the foreseeable future.
We have not provided foreign withholding taxes, state income taxes, and federal and state income taxes on foreign currency gains/losses on accumulated undistributed earnings of certain foreign subsidiaries because these earnings are considered to be permanently reinvested. It is not practicable to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings. We do not anticipate the need to repatriate funds to the United StatesU.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. Approximately $399$248 million of our total cash and cash equivalents and short-term investments of $522$264 million at December 31, 2016, was2019, were held by our operations outside of the United States. We expect that available cash balancesU.S.
Hedging and credit facilities in the United States, along with cash generated from operations and access to debt markets, will be sufficient to meet our operating and other cash needs for the foreseeable future.Financial Risk
Hedging
Hedging:We are exposed to market risk stemming from changes in commodity prices foreign currency(primarily corn and natural gas), foreign-currency exchange rates, and interest rates. In the normal course of business, we actively manage our exposure to these market risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities. These transactions utilize exchange-traded derivatives or over-the-counter derivatives with investment grade counterparties. Our hedging transactions may include, but are not limited to, a variety of derivative financial instruments such as commoditycommodity-related futures, options and swap contracts, forward currencycurrency-related contracts and options, interest rate swap agreements, and treasuryTreasury lock agreements.agreements (“T-Locks”). See Note 6 of the notesNotes to the consolidated financial statementsConsolidated Financial Statements for additional information.
Commodity Price Risk:
Our principal use of derivative financial instruments is to manage commodity price risk in North America relating to anticipated purchases of corn and natural gas to be used in theour manufacturing process. We periodically enter into futures, options and swap contracts for a portion of our anticipated corn and natural gas usage, generally over the following twelve12 to twenty-four24 months, in order to hedge price risk associated with fluctuations in market prices. Effective with the acquisition of Penford, we now produce and sell ethanol. We now enter into futures contracts to hedge price risk associated with fluctuations in market prices of ethanol. Our derivative instruments are recognized at fair value and have effectively reduced our exposure to changes in market prices for these commodities. We are unable to directly hedge price risk related to co-product sales; however, we occasionally enter into hedges of soybean oil (a competing product to our corn oil) in order to mitigate the price risk of corn oil sales. Unrealized gains and losses associated with marking our commodities-based cash flow hedge derivative instruments to market are recorded as a component of other comprehensive income (“OCI”). AtAs of December 31, 2016,2019, our accumulatedAccumulated other comprehensive loss account (“AOCI”) included $11 million of net losses (net of income tax benefit of $5 million) related to these derivative instruments was not significant.instruments. It is anticipated that most$9 million of thenet losses (net of income tax benefit of $3 million) will be reclassified into earnings during the next twelve12 months. We expect the net losses to be offset by changes in the underlying commodities cost.costs.
Foreign Currency Exchange Risk:
Due to our global operations, including operations in many emerging markets, we are exposed to fluctuations in foreign currencyforeign-currency exchange rates. As a result, we have exposure to translational foreign exchangeforeign-exchange risk when our foreign operationoperations’ results are translated to USU.S. dollars and to transactional foreign exchangeforeign-exchange risk when transactions not denominated in the functional currency of the operating unit are revalued.revalued into U.S. dollars. We primarily use derivative financial instruments such as foreign currencyforeign-currency forward contracts, swaps and options to manage our foreign currency transactional exchange risk. AtWe enter into foreign-currency derivative instruments that are designated as both cash flow hedging instruments as well as instruments not designated as hedging instruments as defined by ASC 815, Derivatives and Hedging. As of December 31, 2016,2019, we had foreign currency forward sales contracts with an aggregate notional amount of $432$621 million and foreign currency forward purchase contracts with an aggregate notional amount of $227$356 million that hedged transactional exposures. The fair valuenot designated as hedging instruments.
As of these derivative instruments is an asset of $5 million at December 31, 2016.
38
We also have foreign currency derivative instruments that hedge certain foreign currency transactional exposures$374 million and areforeign-currency forward purchase contracts with an aggregate notional amount of $541 million designated as cash-flow hedges.cash flow hedging instruments. The amount included in AOCI relating to these hedges at December 31, 20162019, was not significant.$3 million of net gains (net of income tax expense of $1 million). It is anticipated that $3 million of net gains (net of income tax expense of $1 million) will be reclassified into earnings during the next 12 months.
We have significant operations in Argentina. We utilizeIn the official exchange rate published bysecond quarter of 2018, the Argentine governmentpeso rapidly devalued relative to the U.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation in that country exceeded 100 percent as of June 30, 2018. As a result, we elected to adopt highly inflationary accounting as of July 1, 2018 for re-measurement purposes. Due toour affiliate, Ingredion Argentina S.A. Under highly inflationary accounting, our affiliate’s functional currency is the U.S. dollar, and its income statement and balance sheet are measured in U.S. dollars using both current and
38
historical rates of exchange. The effect of changes in exchange controls putrates on Argentine-peso-denominated monetary assets and liabilities is reflected in place by the Argentine government, a parallel market exists for exchanging Argentine pesos to US dollars at rates less favorable than the official rate, although the differenceearnings in rates has recently decreased significantly.financing costs.
Interest Rate Risk:
We occasionally use interest rate swaps and Treasury Lock agreements (“T-Locks”)T-Locks to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, or to achieve a desired proportion of fixed versus floating rate debt, based on current and projected market conditions. We did not have any T-Locks outstanding atas of December 31, 2016 or 2015.2019.
WeAs of December 31, 2019, our AOCI account included $1 million of net losses (net of an insignificant amount of income tax benefit) related to settled T-Locks. These deferred losses are being amortized to financing costs over the terms of the senior notes with which they are associated. It is anticipated that $1 million of these net losses (net of an insignificant amount of income tax benefit) will be reclassified into earnings during the next 12 months.
As of December 31, 2019, we have an interest rate swap agreementsagreement that effectively convertconverts the interest rates on our 6.0 percent $200 million senior notes due April 15, 2017, our 1.8 percent $300 million senior notes due September 25, 2017 and on $200 million of our $400 million 4.625 percentof 4.625% senior notes due November 1, 2020, to variable rates. TheseThis swap agreements callagreement calls for us to receive interest at the fixed coupon rate of the respective notes and to pay interest at a variable rate based on the six-month USU.S. dollar LIBOR rate plus a spread. We have designated thesethis interest rate swap agreementsagreement as hedgesa hedge of the changes in fair value of the underlying debt obligationsobligation attributable to changes in interest rates and account for themit as fair-value hedges.a fair value hedge. The fair value of thesethe interest rate swap agreementsagreement was $3a $1 million loss at December 31, 20162019, and is reflected in the Consolidated Balance Sheet within Other assets, with an offsetting amount recorded in Long-term debt to adjust the carrying amount of the hedged debt obligations.
At December 31, 2016, our accumulated other comprehensive loss account included $4 million of losses (net of tax of $2 million) related to settled Treasury Lock agreements. These deferred losses are being amortized to financing costs over the terms of the senior notes with which they are associated. It is anticipated that $1 million of these losses (net of tax) will be reclassified into earnings during the next twelve months.
Contractual Obligations and Off BalanceOff-Balance Sheet Arrangements
The table below summarizes our significant contractual obligations as of December 31, 2016.2019. Information included in the table is cross-referenced to the notesNotes to the consolidated financial statementsConsolidated Financial Statements elsewhere in this report, as applicable.
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| | | | Payments due by period |
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| | | | | | | Less | | | | | | | | More |
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| Note |
| | |
| than 1 |
| 2 – 3 |
| 4 – 5 |
| than 5 |
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Contractual Obligations (in millions) | | reference | | Total | | year | | years | | years | | years |
| |||||
Long-term debt |
| 7 | | $ | 1,766 | | $ | 600 | | $ | 416 | | $ | — | | $ | 750 | |
Interest on long-term debt |
| 7 | |
| 444 | |
| 75 | | | 65 | | | 65 | | | 239 | |
Operating lease obligations |
| 8 | |
| 189 | |
| 49 | |
| 69 | |
| 38 | |
| 33 | |
Pension and other postretirement obligations |
| 10 | |
| 134 | |
| 7 | |
| 15 | |
| 15 | |
| 97 | |
Purchase obligations (a) | | | |
| 882 | |
| 288 | | | 261 | | | 132 | | | 201 | |
Total (b) | | | | $ | 3,415 | | $ | 1,019 | | $ | 826 | | $ | 250 | | $ | 1,320 | |
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| Payments due by period |
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(in millions) |
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| Less |
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| More |
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Contractual |
| Note |
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| than 1 |
| 2 – 3 |
| 4 – 5 |
| than 5 |
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Obligations |
| reference |
| Total |
| year |
| years |
| years |
| years |
| |||||
Long-term debt |
| 7 |
| $ | 1,850 |
| $ | 500 |
| $ | — |
| $ | 600 |
| $ | 750 |
|
Interest on long-term debt |
| 7 |
|
| 630 |
|
| 80 |
|
| 125 |
|
| 89 |
|
| 336 |
|
Operating lease obligations |
| 8 |
|
| 223 |
|
| 45 |
|
| 77 |
|
| 51 |
|
| 50 |
|
Pension and other postretirement obligations |
| 10 |
|
| 119 |
|
| 7 |
|
| 8 |
|
| 8 |
|
| 96 |
|
Purchase obligations (a) |
|
|
|
| 1,114 |
|
| 270 |
|
| 324 |
|
| 268 |
|
| 252 |
|
Total (b) |
|
|
| $ | 3,936 |
| $ | 902 |
| $ | 534 |
| $ | 1,016 |
| $ | 1,484 |
|
| (a) |
| The purchase obligations relate principally to raw material and power supply |
| (b) |
| The above table does not reflect unrecognized income tax benefits of |
39
Key Financial Performance Metrics
We use certain key financial performance metrics to monitor our progress towards achieving our long-term strategic business objectives. These metrics relate to our return on capital employedability to drive profitability, create value for shareholders, and monitor our financial leverage, each of which is tracked on an ongoing basis.leverage. We assess whether we are achieving an adequate return on invested capitalour profitability and value creation objectives by measuring our “ReturnAdjusted Return on Invested Capital Employed” (“ROCE”Adjusted ROIC”) against our cost of capital.. We monitor our financial leverage by regularly reviewing our ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization (“Net Debt to Adjusted EBITDA”) and our “NetNet Debt to Capitalization”Capitalization percentage to assure that we are properly financed. We believe these metrics provide valuable managerial information to help us run our business and are useful to investors.
The metrics belowAdjusted ROIC and Net Debt to Adjusted EBITDA include certain information (including Capital Employed, Adjusted(Adjusted Operating Income, net of tax and Adjusted EBITDA, and Net Debt)respectively) that is not calculated in accordance with Generally Accepted Accounting Principles (“GAAP”).GAAP. We also have presented below the most comparable metrics calculated using components determined in accordance with GAAP. Management uses these non-GAAP financial measures internally for strategic decision-making, forecasting future results, and evaluating current performance. By disclosingManagement believes that the non-GAAP financial measures, management intends tometrics provide a more meaningful, consistent comparison of our operating results and trends for the periods presented. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP and reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provideprovides a more complete understanding of factors and trends affecting our business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with generally accepted accounting principles.GAAP.
Non-GAAP financial measures are not prepared in accordance with GAAP; therefore, the information is not necessarily comparable to other companies. A reconciliation of non-GAAP historical financial measures to the most comparable GAAP measure is provided in the tables below.
Our calculations of these key financial metrics for 2016 with comparisons to the prior year are as follows:
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Return on Capital Employed (dollars in millions) |
| 2016 |
| 2015 |
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Total equity * |
| $ | 2,180 |
| $ | 2,207 |
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Add: |
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Cumulative translation adjustment * |
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| 1,025 |
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| 701 |
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Share-based payments subject to redemption* |
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| 24 |
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| 22 |
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Total debt * |
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| 1,838 |
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| 1,821 |
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Less: |
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Cash and cash equivalents * |
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| (434) |
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| (580) |
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Capital employed * (a) |
| $ | 4,633 |
| $ | 4,171 |
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Operating income |
| $ | 808 |
| $ | 660 |
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Adjusted for: |
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Impairment/restructuring charges |
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| 19 |
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| 28 |
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Acquisition /integration costs |
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| 3 |
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| 10 |
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Charge for fair value mark-up of acquired inventory |
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| — |
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| 10 |
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Litigation settlement |
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| — |
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| 7 |
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Gain on sale of plant |
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| — |
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| (10) |
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Adjusted operating income |
| $ | 830 |
| $ | 705 |
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Income taxes (at effective tax rates of 29.4% in 2016 and 31.8% in 2015)** |
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| (244) |
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| (224) |
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Adjusted operating income, net of tax (b) |
| $ | 586 |
| $ | 481 |
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Return on Capital Employed (b/a) |
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| 12.6 | % |
| 11.5 | % |
* Balance sheet amounts used in computing capital employed represent beginning of period balances.
** The effective income tax rate for 2016 and 2015 excludes the impacts of impairment/restructuring charges, acquisition and integration related costs, a litigation settlement cost and a gain on the sale of a plant. Including
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these items, the Company’s effective income tax rate for 2016 and 2015 was 33.1 percent and 31.2 percent, respectively. Listed below is a schedule that reconciles our effective income tax rate under US GAAP to the adjusted income tax rate.
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| Income before |
| Provision for |
| Effective Income |
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| Income Taxes (a) |
| Income Taxes (b) |
| Tax Rate (b÷a) |
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(dollars in millions) |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
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As reported |
| $ | 742 |
| $ | 599 |
| $ | 246 |
| $ | 187 |
| 33.1 | % | 31.2 | % |
Add back (deduct): |
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Income tax settlement |
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| — |
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| — |
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| (27) |
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| — |
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Impairment/restructuring charges |
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| 19 |
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| 28 |
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| 5 |
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| 10 |
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Acquisition/integration costs |
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| 3 |
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| 10 |
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| 1 |
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| 3 |
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Charge for fair value mark-up of acquired inventory |
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| — |
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| 10 |
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| — |
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| 4 |
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Litigation settlement cost |
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| — |
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| 7 |
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| — |
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| 2 |
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Gain on sale of plant |
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| — |
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| (10) |
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| — |
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| (1) |
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Adjusted-non-GAAP |
| $ | 764 |
| $ | 644 |
| $ | 225 |
| $ | 205 |
| 29.4 | % | 31.8 | % |
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Net Debt to Adjusted EBITDA ratio (dollars in millions) |
| 2016 |
| 2015 |
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Short-term debt |
| $ | 106 |
| $ | 19 |
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Long-term debt |
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| 1,850 |
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| 1,819 |
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Less: Cash and cash equivalents |
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| (512) |
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| (434) |
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Short-term investments |
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| (4) |
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| (6) |
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Total net debt (a) |
| $ | 1,440 |
| $ | 1,398 |
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Net income attributable to Ingredion |
| $ | 485 |
| $ | 402 |
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Add back: |
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Impairment/restructuring charges |
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| 19 |
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| 28 |
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Acquisition /integration costs |
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| 3 |
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| 10 |
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Charge for fair value mark-up of acquired inventory |
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| — |
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| 10 |
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Litigation settlement |
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| — |
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| 7 |
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Gain on sale of plant |
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| — |
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| (10) |
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Net income attributable to non-controlling interest |
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| 11 |
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| 10 |
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Provision for income taxes |
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| 246 |
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| 187 |
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Financing costs, net of interest income of $10 and $14, respectively |
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| 66 |
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| 61 |
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Depreciation and amortization |
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| 196 |
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| 194 |
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Adjusted EBITDA (b) |
| $ | 1,026 |
| $ | 899 |
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Net Debt to Adjusted EBITDA ratio (a ÷ b) |
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| 1.4 |
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| 1.6 |
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Net Debt to Capitalization percentage (dollars in millions) |
| 2016 |
| 2015 |
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Short-term debt |
| $ | 106 |
| $ | 19 |
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Long-term debt |
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| 1,850 |
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| 1,819 |
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Less: Cash and cash equivalents |
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| (512) |
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| (434) |
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Short-term investments |
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| (4) |
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| (6) |
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Total net debt (a) |
| $ | 1,440 |
| $ | 1,398 |
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Deferred income tax liabilities |
| $ | 171 |
| $ | 139 |
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Share-based payments subject to redemption |
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| 30 |
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| 24 |
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Total equity |
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| 2,595 |
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| 2,180 |
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Total capital |
| $ | 2,796 |
| $ | 2,343 |
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Total net debt and capital (b) |
| $ | 4,236 |
| $ | 3,741 |
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Net Debt to Capitalization percentage (a/b) |
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| 34.0 | % |
| 37.4 | % |
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Commentary on Key Financial Performance Metrics:
In accordance with our long-term objectives, we set certain objectives relating to these key financial performance metrics that we strive to meet. AtAs of December 31, 2016,2019, we had achieved all of our established objectives.objectives identified as described below. However, no assurance can be given that we will continue to meet our financial performance metric targets. See Item 1A “Risk Factors”1A. Risk Factors and Item 7A “Quantitative7A. Quantitative and Qualitative Disclosures About Market Risk.” The objectives set out below reflect our current aspirations in light of our present plans and existing circumstances. We may change these objectives from time to time in the future to address new opportunities or changing circumstances as appropriate to meet our long-term needs and those of our shareholders.
ROCE — A reconciliation of non-GAAP historical financial measures to the most comparable GAAP measure is provided in the tables below.
Adjusted ROIC: Adjusted ROIC is a financial performance metric ratio not defined under GAAP, and it should be considered in addition to, and not as a substitute for, GAAP financial measures. The Company defines Adjusted ROIC as Adjusted operating income, net of tax, divided by Average current year and prior year Total net debt and equity. Similarly named measures may not be defined and calculated by other companies in the same manner. The Company believes Adjusted ROIC is meaningful to investors as it focuses on profitability and value-creating potential, taking into account the amount of capital invested. The most comparable measure calculated using components determined in accordance with GAAP is Return on Invested Capital, which the Company defines as Net income, divided by Average current year and prior year Total net debt and equity. The calculations for Return on Invested Capital and Adjusted ROIC are provided in the table below.
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Return on Invested Capital (dollars in millions) | | 2019 | | 2018 | | ||
Net income (a) | | $ | 424 | | $ | 454 | |
Adjusted for: | | | | | | | |
Provision for income taxes (iii) | | | 158 | | | 167 | |
Other, non-operating expense (income), net | | | 1 | | | (4) | |
Financing cost, net | | | 81 | | | 86 | |
Restructuring/impairment charges (i) | | | 57 | | | 64 | |
Acquisition/integration costs | | | 3 | | | 0 | |
Other matters (ii) | | | (19) | | | 0 | |
Income taxes (at effective rates of 26.3% and 25.8%, respectively) (iii) | | | (185) | | | (198) | |
Adjusted operating income, net of tax (b) | | | 520 | | | 569 | |
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Short-term debt | | | 82 | | | 169 | |
Long-term debt | | | 1,766 | | | 1,931 | |
Less: Cash and cash equivalents | | | (264) | | | (327) | |
Short-term investments | | | (4) | | | (7) | |
Total net debt | | | 1,580 | | | 1,766 | |
Total equity and Share-based payments subject to redemption | | | 2,772 | | | 2,445 | |
Total net debt and equity | | $ | 4,352 | | $ | 4,211 | |
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Average current and prior year Total net debt and equity (c) | | $ | 4,282 | | $ | 4,212 | |
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Return on Invested Capital (a ÷ c) | | | 9.7% | | | 10.8% | |
Adjusted Return on Invested Capital (b ÷ c) | | | 12.1% | | | 13.5% | |
| (i) | During the year ended December 31, 2019, the Company recorded $57 million of pre-tax restructuring/impairment charges. During the year ended December 31, 2019, the Company recorded $57 million of pre-tax restructuring charges, including $29 million of net restructuring related expenses as part of the Cost Smart cost of sales program and $28 million of employee-related and other costs, including professional services, associated with our Cost Smart SG&A program.During the year ended December 31, 2018, we recorded $64 million of pre-tax restructuring/impairment charges. During the year ended December 31, 2018, we recorded $64 million of pre-tax restructuring charges consisting of $49 million of restructuring expenses as part of the Cost Smart cost of sales program, $11 million of restructuring charges related to the Cost Smart SG&A program, and $4 million of restructuring charges related to other projects. |
| (ii) | During the year ended December 31, 2019, we recorded a $22 million pre-tax benefit for the favorable judgement received by Ingredion from the Federal Court of Appeals in Brazil related to certain indirect taxes collected in prior years. As a result of the decision, the Company expects to be entitled to credits against its Brazilian federal tax payments in 2020 and future years. The benefit recorded represents the Company's current estimate of the credits and interest due from the favorable decision in accordance with ASC 450, Contingencies. This benefit was offset by other adjusted charges during the period. |
| (iii) | The effective income tax rate for the years ended December 31, 2019 and 2018 was 27.1 percent and 26.1 percent, respectively. For purposes of this calculation we exclude the provision for income taxes from the calculation and subsequently add back income taxes for adjusted operating income using the adjusted effective income tax rate. The adjusted effective income tax rate is calculated by removing the tax impact for the identified adjusted items below. |
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| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | ||||||||||||
(dollars in millions) |
| Income before Income Taxes |
| Provision for Income Taxes | | Effective Income Tax Rate | | Income before Income Taxes |
| Provision for Income Taxes | | Effective Income Tax Rate | ||||
As reported | | $ | 582 | | $ | 158 | | 27.1% | | $ | 621 | | $ | 167 | | 26.9% |
Add back (deduct): | | | | | | | | | | | | | | | | |
Impairment/restructuring charges | |
| 57 | |
| 13 | | | |
| 64 | |
| 13 | | |
Acquisition/integration costs | |
| 3 | |
| 1 | | | |
| — | |
| — | | |
Insurance settlement | |
| — | |
| — | | | |
| — | | | (3) | | |
Other matters | |
| (19) | | | (8) | | | |
| — | | | — | | |
Adjusted non-GAAP | | $ | 623 | | $ | 164 | | 26.3% | | $ | 685 | | $ | 177 | | 25.8% |
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Our long-term objective is to achieve a ROCEmaintain an Adjusted ROIC in excess of 10.012 percent. In determining this performance metric,For the negative cumulative translation adjustmentyear ended December 31, 2019, we achieved an Adjusted ROIC of 12.1 percent as compared to 13.5 percent as of December 31, 2018. The decrease in Adjusted ROIC percentage is added back to total equity to calculate returns based on the Company’s original investment costs. Our ROCE for 2016 improved to 12.6 percent from 11.5 percent in 2015, reflecting ourprimarily a result of lower adjusted operating income, growthnet of tax in 2016.2019.
Net Debt to Adjusted EBITDA:Net Debt to Adjusted EBITDA is a financial performance ratio — that is not defined under GAAP, and it should be considered in addition to, and not as a substitute for, GAAP financial measures. The Company defines this measure as Short-term and Long-term debt less Cash and cash equivalents and Short-term investments, divided by Adjusted EBITDA. Similarly named measures may not be defined and calculated by other companies in the same manner. The Company believes Total net debt to Adjusted EBITDA is meaningful to investors as it focuses on the Company’s leverage on a comparable EBITDA basis, and helps investors better understand the time required to pay back the Company’s outstanding debt. The most comparable ratio calculated using components determined in accordance with GAAP is Total net debt to Income before income taxes, calculated as Short-term and Long-term debt less Cash and cash equivalents and Short-term investments, divided by Income before income taxes. The calculations for the ratio of Total net debt to Income before income taxes and for the ratio of Total net debt to Adjusted EBITDA are provided in the table below.
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Net Debt to Adjusted EBITDA ratio | | 2019 | | 2018 | | ||
Short-term debt | | $ | 82 | | $ | 169 | |
Long-term debt | | | 1,766 | | | 1,931 | |
Less: Cash and cash equivalents | | | (264) | | | (327) | |
Short-term investments | | | (4) | | | (7) | |
Total net debt (a) | | | 1,580 | | | 1,766 | |
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Income before income taxes (b) | | | 582 | | | 621 | |
Adjusted for: | | | | | | | |
Depreciation and amortization | | | 220 | | | 247 | |
Financing cost, net | | | 81 | | | 86 | |
Restructuring/impairment (i) | | | 44 | | | 30 | |
Acquisition/integration costs | | | 3 | | | — | |
Other matters (ii) | | | (19) | | | — | |
Adjusted EBITDA (c) | | $ | 911 | | $ | 984 | |
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Net Debt to Income before income tax ratio (a ÷ b) | | | 2.7 | | | 2.8 | |
Net Debt to Adjusted EBITDA ratio (a ÷ c) | | | 1.7 | | | 1.8 | |
| (i) | 2019 Restructuring/impairment charges are reduced by $13 million to exclude the accelerated depreciation primarily related to the Lane Cove, Australia production facility closure. 2018 Restructuring/impairment charges are reduced above by $34 million to exclude the accelerated depreciation from cessation of wet-milling at the Stockton, California plant. The accelerated depreciation is included in Depreciation and amortization above, and to include in restructuring/impairment charge would include the charge twice. See Note 5 for reconciliation to the $57 million and $64 million restructuring charges recorded in 2018 and 2019, respectively. |
| (ii) | During the year ended December 31, 2019, we recorded a $22 million pre-tax benefit for the favorable judgement received by Ingredion from the Federal Court of Appeals in Brazil related to certain indirect taxes collected in prior years. As a result of the decision, the Company expects to be entitled to credits against its Brazilian federal tax payments in 2020 and future years. The benefit recorded represents the Company's current estimate of the credits and interest due from the favorable decision in accordance with ASC 450, Contingencies. This benefit was offset by other adjusted charges during the period. |
Our long-term objective is to maintain a ratio of net debtNet Debt to adjustedAdjusted EBITDA of less than 2.25. ThisAs of December 31, 2019, the ratio was 1.4 at1.7, which is a decrease from 1.8 as of December 31, 2016, down from 1.6 last year and remains below our target.2018. The declinedecrease primarily reflects our earnings growth.reduction of net debt in 2019.
Net Debt to Capitalization percentage: The Company defines Net Debt to Capitalization percentage — as Total net debt, defined as Short-term and Long-term debt less Cash and cash equivalents and Short-term investments, divided by Total net debt and capital, defined as the sum of Deferred income tax liabilities, Share-based payments subject to
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redemption, Total equity, and Total net debt. The calculations for Net Debt to Capitalization percentage are provided in the table below.
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Net Debt to Capitalization percentage (dollars in millions) |
| 2019 |
| 2018 | ||
Short-term debt | | $ | 82 | | $ | 169 |
Long-term debt | |
| 1,766 | |
| 1,931 |
Less: Cash and cash equivalents | |
| (264) | |
| (327) |
Short-term investments | |
| (4) | |
| (7) |
Total net debt (a) | | | 1,580 | | | 1,766 |
Deferred income tax liabilities | | | 195 | | | 189 |
Share-based payments subject to redemption | | | 31 | | | 37 |
Total equity | | | 2,741 | | | 2,408 |
Total capital | | | 2,967 | | | 2,634 |
Total net debt and capital (b) | | $ | 4,547 | | $ | 4,400 |
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Net Debt to Capitalization percentage (a ÷ b) | |
| 34.7% | |
| 40.1% |
Our long-term objective is to maintain a Net Debt to Capitalization percentage in the range of 32 to 35 percent. AtAs of December 31, 2016,2019, our Net Debt to Capitalization percentage was 34.034.7 percent, down from 37.440.1 percent a year ago,as of December 31, 2018, primarily reflecting a higher capital base driven by the impactour reduction of our 2016Total net income.debt in 2019.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions and conditions.
We have identified below the most critical accounting policies upon which the financial statements are based and that involve our most complex and subjective decisions and assessments. Our senior management has discussed the development, selection and disclosure of these policies with members of the Audit Committee of our Board of Directors. These accounting policies are provided in the notesNotes to the consolidated financial statements.Consolidated Financial Statements. The discussion that follows should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Business Combinations
Combinations:Our acquisitionsacquisition of Western Polymer in 2016 of Shandong Huanong Specialty Corn Development Co., Ltd. and TIC Gums Incorporated and in 2015 of Penford Corporation and Kerr Concentrates, Inc. were2019 was accounted for in accordance with ASCAccounting Standards Codification (“ASC”) Topic 805, Business Combinations as amended.. In purchase accounting, identifiable assets acquired and liabilities assumed, are recognized at their estimated fair values at the acquisition date, and any remaining purchase price is recorded as goodwill. In determining the fair values of assets acquired and liabilities assumed, we make significant estimates and assumptions, particularly with respect to long-lived tangible and intangible assets. Critical estimates used in valuing tangible and intangible assets include, but are not limited to, future expected cash flows, discount rates, market prices and asset lives. Although our estimates of fair value are based upon assumptions believed to be reasonable, actual results may differ. See Note 3 of the notesNotes to the consolidated financial statementsConsolidated Financial Statements for more information related to our acquisitions.
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Property, Plant and Equipment and Definite-Lived Intangible Assets
Assets:We have substantial investments in property, plant and equipment (“PP&E”) and definite-lived intangible assets. For property, plant and equipment,PP&E, we recognize the cost of depreciable assets in operations over the estimated useful life of the assets and evaluate the recoverability of these assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. For definite-lived intangible assets, we recognize the cost of these amortizable assets in operations over their estimated useful life and evaluate the recoverability of the assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The carrying valuevalues of property, plant and equipmentPP&E and definite-lived intangible assets at December 31, 2016 was $2.12019, were $2.3 billion and $301$259 million, respectively.
In assessing the recoverability of the carrying value of property, plant and equipmentPP&E and definite-lived intangible assets, we may have to make projections regarding future cash flows. In developing these projections, we make a variety of important assumptions and estimates that have a significant impact on our assessments of whether the carrying values of property, plant and equipmentPP&E and definite-lived intangible assets should be adjusted to reflect impairment. Among these are assumptions and estimates about the future growth and profitability of the related business unit or asset group, anticipated future economic, regulatory and political conditions in the business unit’s or asset group’s market and estimates of terminal or disposal values.
No significant impairment charges for property, plant, and equipmentPP&E or definite-lived intangible assets were recorded in 2016. However, significant risk and uncertainty exists concerning certain manufacturing assets in Argentina and Brazil that we are closely monitoring due to increased volatility experienced due to continued slow economic growth, heightened competition, and possible future negative economic growth.2019.
In 2015, we announced plans to consolidate our manufacturing network in Brazil. Plants in Trombudo Central and Conchal have been closed and production has been moved to plants in Balsa Nova and Mogi Guaçu, respectively. In 2015, we recorded total pre-tax restructuring-related charges of $12 million related to these plant closures, which included a $10 million charge for impaired assets.
Through our continual assessment to optimize our operations, we address whether there is a need for additional consolidation of manufacturing facilities or to redeploy assets to areas where we can expect to achieve a higher return on our investment. This review may result in the closing or selling of certain of our manufacturing facilities. The closing or selling of any of the facilities could have a significant negative impact on the results of operations in the year that the closing or selling of a facility occurs.
Even though it was determined that there was no additional long-lived asset impairment as of December 31, 2016,2019, the future occurrence of a potential indicator of impairment, such as a significant adverse change in the business climate that would require a change in our assumptions or strategic decisions made in response to economic or competitive conditions, could require us to perform tests of recoverability in the future.
Indefinite-Lived Intangible Assets and Goodwill: We continue to closely monitorhave certain indefinite-lived intangible assets in our South America business due to the volatilityform of trade names and challenging economic environment in the segment.
Goodwill and Indefinite-Lived Intangible Assets
trademarks. Our methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a number of factors, including valuations performed by third-party appraisers when appropriate. Goodwill is measured as the excess of the cost of an acquired entitybusiness over the fair value assigned to identifiable assets acquired and liabilities assumed. We have identified several reporting units for which cash flows are determinable and to which goodwill may be allocated. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative excess fair value of each reporting unit. In addition, we have certain indefinite-lived intangible assets in the form of trade names and trademarks. The carrying value of goodwill and indefinite-lived intangible assets and goodwill at December 31, 20162019, was $784$178 million and $201$801 million, respectively, compared to $601$178 million and $144$791 million, respectively, a year ago. The increase in both
We assess indefinite-lived intangible assets and goodwill andfor impairment annually (or more frequently if impairment indicators arise). We perform this annual impairment assessment as of July 1 each year. In testing indefinite-lived intangible assets for impairment, we first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is mainly due toimpaired. After assessing the acquisition of TIC Gums in 2016, which were identified in purchase accounting and are open to change asqualitative factors, if the
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Company finalizes purchase accounting for the acquisition. See Note 3 of the notes to the consolidated financial statements for additional information related to our acquisition of TIC Gums.
We perform our goodwill and indefinite-lived intangible asset impairment tests annually as of October 1, or more frequently if an event occurs or circumstances change we determine that would more likely than not reduceit is more-likely-than-not that the fair value of a reporting unit belowan indefinite-lived intangible asset is greater than its carrying value. amount, then we would not be required to compute the fair value of the indefinite-lived intangible asset. In the event the qualitative assessment leads us to conclude otherwise, then we would be required to determine the fair value of the indefinite-lived intangible assets and perform a quantitative impairment test in accordance with ASC subtopic 350-30. In performing the qualitative analysis, we consider various factors including net sales derived from these intangibles and certain market and industry conditions. Based on the results of our assessment, we concluded that as of July 1, 2019, there were no impairments in our indefinite-lived intangible assets.
In testing goodwill for impairment, we first assessesassess qualitative factors in determining whether it is more likely than notmore-likely-than-not that the fair value of a reporting unit is less than its carrying amount. After assessing the qualitative factors, if we determine that it is not more likely than notmore-likely-than-not that the fair value of a reporting unit is lessgreater than its carrying amount, then we do not perform the two-step impairment test. If we conclude otherwise, then we perform the first step of the two-step
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impairment test as described in ASC Topic 350. In the first step (“Step One”), the fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit exceeds the carrying value of its net assets, goodwill is not considered impaired and no further testing is required. If the carrying value of the net assets exceeds the fair value of the reporting unit, a second step (“Step Two”) of the impairment assessment is performed in order to determine the implied fair value of a reporting unit’s goodwill.
In performing our impairment tests for goodwill, management makes certain estimates and judgments. These estimates and judgments include the identification of reporting units and the determination of fair values of reporting units, which management estimates using both discounted cash flow analyses and an analysis of market multiples. Significant assumptions used in the determination of fair value for reporting units include estimates for discount and long-term net sales growth rates, in addition to operating and capital expenditure requirements. We considered changes in discount rates for the reporting units based on current market interest rates and specific risk factors within each geographic region. We also evaluated qualitative factors, such as legal, regulatory, or competitive forces, in estimating the impact to the fair value of the reporting units noting no significant changes that would result in any reporting unit failing the impairment test. Changes in assumptions concerning projected results or other underlying assumptions could have a significant impact on the fair value of the reporting units in the future. Based on the results of the annual assessment, we concluded that as of OctoberJuly 1, 2016, it was more likely than not that the fair value of2019, there were no impairments in our reporting units was greater than their carrying value (although the $26 million of goodwill at our Brazil reporting unit continues to be closely monitored due to recent trends and increased volatility experienced in this reporting unit, such as continued slow economic growth, heightened competition and possible future negative economic growth).units.
In performing the qualitative annual impairment assessment for other indefinite-lived intangible assets, we considered various factors in determining if it was more likely than not that the fair value of these indefinite-lived intangible assets was greater than their carrying value. We evaluated net sales attributable to these intangible assets as compared to original projections and evaluated future projections of net sales related to these assets. In addition, we considered market and industry conditions in the reporting units in which these intangible assets reside noting no significant changes that would result in a failed Step One impairment test as described in ASC Topic 350. Based on the results of this qualitative assessment as of October 1, 2016, we concluded that it was more likely than not that the fair value of these indefinite-lived intangible assets was greater than their carrying value.
Income Taxes
Taxes:We recognize the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities and provide a valuation allowance when deferred tax assets are not more likely than not to be realized. We have considered forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, we would increase the valuation allowance and make a corresponding charge to earnings in the period in which we make such determination. Likewise, if we later determine that we are more likely than not to realize the deferred tax assets, we would reverse the applicable portion of the previously provided valuation allowance. We had a valuation allowance of $21$29 million and $12$31 million at December 31, 20162019, and 2015,2018, respectively. Of the $9 million increaseThe decrease in the valuation allowance from 20152019 to 2016, $7 million2018 is primarily attributable to a valuationthe devaluation of the Argentina Peso offset by an increased allowance recorded on the net deferred tax assets (including net operating losses) ofin Argentina.
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We are regularly audited by various taxing authorities, and sometimes these audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes. We establish reserves when, despite our belief that our tax return positions are appropriate and supportable under local tax law, we believe there is uncertainty with respect to certain positions and we may not succeed in realizing the tax benefit.benefits. We evaluate these unrecognized tax benefits and related reserves each quarter and adjust the reserves and the related interest and penalties in light of changing facts and circumstances regarding the probability of realizing tax benefits, such as the settlement of a tax audit or the expiration of a statute of limitations. We believe the estimates and assumptions used to support our evaluation of tax benefit realization are reasonable. However, final determinations of prior-year tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially different than estimates reflected in assets and liabilities and historical income tax provisions. The outcome of these final determinations could have a material effect on our income tax provision, net income, or cash flows in the period in which that determination is made. We believe our tax positions comply with applicable tax law and that we have adequately provided for any known tax contingencies. We have been pursuing relief from double taxation under the US and Canadian tax treaty for the years 2004-2013. During the 4th quarter of 2016, a tentative agreement was reached between the US and Canada for the specific issues being contested. We have established a net reserve of $24 million including interest, recorded as a $70 million liability and $46 million benefit. In addition, as a result of the settlement, for the years 2014-2016, we established a net reserve of $7 million, recorded as $21 million liability and $14 million benefit. Our liability for unrecognized tax benefits, excluding interest and penalties at December 31, 20162019 and 20152018 was $86$22 million and $12$30 million, respectively. The $74 million increase from 2015 to 2016 is primarily attributable to the US Canada process referenced above, offset by other reversals in the period.
No foreign withholding taxes, state income taxes, and federal and state taxes on foreign currency gains and losses have been provided on approximately $2.7$3.0 billion of undistributed earnings of foreign earnings that are planned to beconsidered indefinitely reinvested. If future events, including changes in tax law, material changes in estimates of cash, working capital, and long-term investment requirements, necessitate that these earnings be distributed, an additional provision for income and withholding taxes may apply, which could materially affect our future effective tax rate and cash flows.
Retirement Benefits
The CompanyBenefits: We and itsour subsidiaries sponsor noncontributory defined benefit pension plans (qualified and non-qualified) covering a substantial portion of employees in the United StatesU.S. and Canada, and certain employees in other foreign countries. We also provide healthcare and life insurance benefits for retired employees in the United States,U.S., Canada, and
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Brazil. In order to measure the expense and obligations associated with these benefits, our management must make a variety of estimates and assumptions including discount rates, expected long-term rates of return, rate of compensation increases, employee turnover rates, retirement rates, mortality rates and other factors. We review our actuarial assumptions on an annual basis as of December 31 (or more frequently if a significant event requiring remeasurement occurs) and modify our assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the balance sheet, but are generally amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income. We believe the assumptions utilized in recording our obligations under our plans, which are based on our experience, market conditions, and input from our actuaries, are reasonable. We use third-party specialists to assist management in evaluating our assumptions and estimates, as well as to appropriately measure the costs and obligations associated with our retirement benefit plans. Had we used different estimates and assumptions with respect to these plans, our retirement benefit obligations and related expense could vary from the actual amounts recorded, and such differences could be material. Additionally, adverse changes in investment returns earned on pension assets and discount rates used to calculate pension and postretirement benefit related liabilities or changes in required funding levels may have an unfavorable impact on future expense and cash flow. Net periodic pension and postretirement benefit cost for all of our plans was $8$10 million in 20162019 and $6 million in 2015.2018.
We determine our assumption for the discount rate used to measure year-end pension and postretirement obligations based on high-quality fixed-income investments that match the duration of the expected benefit payments, which has been benchmarked using a long-term, high-quality AA corporate bond index. In 2016, we changed the method used to estimate the service and interest cost components of net periodic benefit cost for our certain of our defined benefit pension and postretirement benefit plans. Historically, we estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2016, we have elected toWe use a full yield curve approach in the estimation of these
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the service and interest cost components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We have made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. This change does not affect the measurement of our total benefit obligations as the change in the service cost and interest cost is completely offset in the actuarial (gain) loss reported. The weighted average discount rate used to determine our obligations under USU.S. pension plans foras of December 31, 20162019 and 20152018 was 4.303.34 percent and 4.544.38 percent, respectively. The weighted average discount rate used to determine our obligations under non-USnon-U.S. pension plans foras of December 31, 20162019 and 20152018 was 4.343.55 percent and 4.574.33 percent, respectively. The weighted average discount rate used to determine our obligations under our postretirement plans foras of December 31, 20162019 and 20152018 was 5.424.18 percent and 5.305.24 percent, respectively.
A one-percentageone percentage point decrease in the discount rates at December 31, 20162019, would have increased the accumulated benefit obligation and projected benefit obligation by the following amounts (millions):
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U.S. Pension Plans | | | |
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Accumulated benefit obligation | | $ | 49 | |
Projected benefit obligation | | | 50 | |
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Non-U.S. Pension Plans | | | | |
Accumulated benefit obligation | | $ | 31 | |
Projected benefit obligation | | | 34 | |
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Postretirement Plans | | | | |
Accumulated benefit obligation | | $ | 9 | |
We changed our investment approach and related asset allocation for the USU.S. and Canada plans during 2016 to a liability-driven investment approach by which a higher proportion of investments will be in interest-rate sensitive investments (fixed income) under an active-management approach as compared to the prior passive investment strategy. The approach seeks to protect the current funded status of the plans from market volatility with a greater asset allocation to interest-rate sensitive assets. The greater allocation to interest-rate sensitive assets is expected to reduce volatility in plan funded status by more closely matching movements in asset values to changes in liabilities.
Our current investment policy for our pension plans is to balance risk and return through diversified portfolios of passively-managedactively-managed equity index instruments, fixed income index securities, and short-term investments. Maturities for fixed income securities are managed such that sufficient liquidity exists to meet near-term benefit payment obligations. The asset allocation is reviewed regularly and portfolio investments are rebalanced to the targeted allocation when considered appropriate or to raise sufficient liquidity when necessary to meet near-term benefit payment obligations. For 20172020 net periodic pension cost, we assumed an expected long-term rate of return on assets, which is based on the fair value of plan assets, of 5.755.30 percent for USU.S. plans and approximately 4.763.86 percent for Canadian plans. In developing the expected long-termlong-
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term rate of return assumption on plan assets, which consist mainly of USU.S. and Canadian equitydebt and debtequity securities, management evaluated historical rates of return achieved on plan assets and the asset allocation of the plans, input from our independent actuaries and investment consultants, and historical trends in long-term inflation rates. Projected return estimates made by such consultants are based upon broad equity and bond indices. We also maintain several funded pension plans in other international locations. The expected returns on plan assets for these plans are determined based on each plan’s investment approach and asset allocations. A hypothetical 25 basis point decrease in the expected long-term rate of return assumption would increase 20172020 net periodic pension cost for the USU.S. and Canada plans by less than $1 million each.
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Healthcare cost trend rates are used in valuing our postretirement benefit obligations and are established based upon actual health care cost trends and consultation with actuaries and benefit providers. At December 31, 2016,2019, the health care cost trend rate assumptions for the next year for the US,U.S., Canada, and Brazil plans were 6.906.00 percent, 6.905.83 percent and 8.667.38 percent, respectively.
The sensitivities of service cost and interest cost and year-end benefit obligations to changes in healthcare cost trend rates (both initial and ultimate rates) for the postretirement benefit plans as of December 31, 20162019, are as follows:
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(in millions) | |
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One-percentage point increase in trend rates: | | | | |
Increase in service cost and interest cost components | | $ | — | |
Increase in year-end benefit obligations | |
| 6 | |
| | | | |
One-percentage point decrease in trend rates: | | | | |
Decrease in service cost and interest cost components | |
| — | |
Decrease in year-end benefit obligations | |
| 5 | |
See Note 10 of the notesNotes to the consolidated financial statementsConsolidated Financial Statements for more information related to our benefit plans.
New Accounting Standards
In May 2014,January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The FASB has also issued additional ASUs to provide further updates and clarification to the Update, including ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. We plan to adopt the standard as of the effective date. The standard will allow various transition approaches upon adoption. We plan to use the modified retrospective approach for the transition to the new standard. Based on the analysis performed by the Company to date, our preliminary assessment is that the adoption of this guidance in the Update will not have a material impact on the Company’s revenue recognition timing or amounts, however, that assessment could change as we complete our analysis. We anticipate that our assessment will be complete by the third quarter of 2017.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This Update requires an entity to measure inventory at the lower of cost and net realizable value, removing the consideration of current replacement cost. It is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. We do not expect that the adoption of the guidance in this Update will have a material impact on our Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update requires, among other things, that equity investments having readily determinable fair values be measured at fair value with changes recognized in net income rather than other comprehensive income. Equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this Update. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this Update are to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. We do not expect that the adoption of the guidance in this Update will have a material impact on our Consolidated Financial Statements.
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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. This Update increases the transparency and comparability of organizations by recognizing lease assets and lease liabilities on the balance sheet for leases longer than 12 months and disclosing key information about leasing arrangements. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed. This Update is effective for annual periods beginning after December 15, 2018, with early adoption permitted. We currently plan to adopt the standard as of the effective date. Adoption will require a modified retrospective transition. We expect the adoption of the guidance in this Update to have a material impact on our Consolidated Balance Sheet as operating leases will be recognized both as assets and liabilities on the balance sheet. We are in the process of quantifying the magnitude of these changes and assessing the implementation strategy for accounting for these changes.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This Update simplifies the subsequent measurement of Goodwillgoodwill as the Update eliminates Step 2 from the goodwill impairment test. Instead, under the Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized not to exceed the total amount of goodwill allocated to that reporting unit. This Update is effective for annual periods beginning after December 15, 2019, with early adoption permitted. We do not expectwill adopt ASU 2017-04 at the beginning of our 2020 fiscal year and the Update towill not have a material impact on our Consolidated Financial Statements. Statements upon adoption.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires us to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. This Update is effective for annual periods beginning after December 15, 2019, with early adoption permitted. We will adopt ASU 2016-13 at the beginning of our 2020 fiscal year and the Update will not have a material impact on our Consolidated Financial Statements upon adoption.
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Forward-Looking Statements
This Form 10-K contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends these forward-looking statements to be covered by the safe harbor provisions for such statements.
Forward-looking statements include, among other things,others, any statements regarding the Company’s prospects or future financial condition, earnings, revenues, tax rates, capital expenditures, cash flows, expenses or other financial items, any statements concerning the Company’s prospects or future operations, including management’s plans or strategies and objectives therefor, and any assumptions, expectations or beliefs underlying the foregoing.
These statements can sometimes be identified by the use of forward looking words such as “may,” “will,” “should,” “anticipate,” “assume”,“assume,” “believe,” “plan,” “project,” “estimate,” “expect,” “intend,” “continue,” “pro forma,” “forecast,” “outlook,” “propels,” “opportunity,“opportunities,” “potential”“potential,” “provisional,” or other similar expressions or the negative thereof. All statements other than statements of historical facts in this report or referred to in or incorporated by reference into this report are “forward-looking statements.”
These statements are based on current circumstances or expectations, but are subject to certain inherent risks and uncertainties, many of which are difficult to predict and are beyond our control. Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, stockholdersinvestors are cautioned that no assurance can be given that our expectations will prove correct.
Actual results and developments may differ materially from the expectations expressed in or implied by these statements, based on various factors, including changing consumption preferences relating to high fructose corn syrup and other raw materials; the effects of global economic conditions including, particularly, continuation or worsening of the current economic, currency and political conditions in South America and economic conditions in Europe, and their impact on our sales volumes and pricing of our products, our ability to collect our receivables from customers and our ability to raise funds at reasonable rates; fluctuations in worldwide markets for corn and other commodities, and the associated risks of hedging against such fluctuations; fluctuations in the markets and prices for our co-products, particularly corn oil; fluctuations in aggregate industry supply and market demand; the behavior of financial markets, including foreign currency fluctuations and fluctuations in interest and exchange rates; volatility and turmoil in the capital markets; the commercial and consumer credit environment; general political, economic, business, and market conditions that affect customers and weather conditionsconsumers in the various geographic regions and countries in which we buy our raw materials or manufacture or sell our products;products, including, particularly, economic, currency and political conditions in South America and economic and political conditions in Europe, and the impact these factors may have on our sales volumes, the pricing of our products and our ability to collect our receivables from customers; future financial performance of major industries which we serve and from which we derive a significant portion of our sales, including, without limitation, the food,
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and beverage, paper and corrugated, and brewing industries; energy coststhe uncertainty of acceptance of products developed through genetic modification and availability, freight and shipping costs, and changes in regulatory controls regarding quotas; tariffs, duties, taxes and income tax rates; particularly United States tax reform; operating difficulties; availability of raw materials, including potato starch, tapioca, acacia gum, guar gum and the specific varieties of corn upon which our products are based;biotechnology; our ability to develop or acquire new products and services at rates or of qualities sufficient to meet expectations; changes in government policy, law or regulations and costs of legal compliance, including with respect to environmental compliance; increased competitive and/or customer pressure in the corn-refining industry and related industries, including with respect to the markets and prices for our primary products and our co-products, particularly corn oil; the availability of raw materials, including potato starch, tapioca, gum Arabic and the specific varieties of corn upon which some of our products are based, and our ability to pass along potential increases in the cost of corn or other raw materials to customers; energy costs and availability, including energy issues in Pakistan; boiler reliability; our ability to effectively integrate and operate acquired businesses; our ability tocontain costs, achieve budgets and to realize expected synergies;synergies, including with respect to our ability to complete planned maintenance and investment projects successfullyon time and on budget;budget, achieving expected savings under our Cost Smart program as well as with respect to freight and shipping costs; the behavior of financial and capital markets, including with respect to foreign currency fluctuations, fluctuations in interest and exchange rates and market volatility and the associated risks of hedging against such fluctuations; our ability to successfully identify and complete acquisitions or strategic alliances on favorable terms as well as our ability to successfully integrate acquired businesses or implement and maintain strategic alliances and achieve anticipated synergies with respect to all of the foregoing; operating difficulties and security breaches with respect to information technology systems, processes and sites, as well as boiler reliability; our ability to maintain satisfactory labor disputes; geneticrelations; the impact that weather, natural disasters, war or similar acts of hostility, acts and biotechnology issues; changing consumption preferences including those relating to high fructose corn syrup; increased competitive and/or customer pressure in the corn-refining industry; andthreats of terrorism, the outbreak or continuation of serious communicable disease or hostilities including acts of terrorism. Factors relatingpandemics and other significant events could have on our business; tariffs, quotas, duties, taxes and income tax rates, particularly United States tax reform enacted in 2017; and our ability to the acquisition of TIC Gums that could cause actual results and developments to differ from expectations include: the anticipated benefits of the acquisition, including synergies, may not be realized; and the integration of TIC Gum’s operations with those of Ingredion may be materially delayed or may be more costly or difficult than expected. raise funds at reasonable rates.
Our forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement as a result of new information or future events or developments. If we do update or correct one or more of these statements, investors and others should not conclude that we will make additional updates or corrections. For a further description of these and other risks, see Item 1A-Risk1A. Risk Factors above and our subsequent reports on FormsForm 10-Q orand Form 8-K.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Exposure. Exposure:We are exposed to interest rate risk on our variable-ratevariable rate debt and price risk on our fixed-ratefixed rate debt. As of December 31, 2016,2019, approximately 5962 percent or $1.15$1.2 billion of our borrowings are fixed-ratetotal debt is fixed rate debt and 4138 percent or approximately $806$697 million of our total debt is variable rate debt subject to changes in short-term rates, which could affect our interest costs. We assess market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential change in earnings, fair values and cash flows based on a hypothetical 1 percentage point change in interest rates at December 31, 2016.2019. A hypothetical increase of 1 percentage point in the weighted average floating interest rate would increase our annual interest expense by approximately $8$3 million. See Note 7 of the notesNotes to the consolidated financial statements entitled “Financing Arrangements”Consolidated Financial Statements for further information.
At December 31, 20162019 and 2015,2018, the carrying and fair values of long-term debt were as follows:
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(in millions) |
| amount |
| value |
| amount |
| value |
| | amount | | value | | amount | | value |
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3.2% senior notes, due October 1, 2026 |
| $ | 496 |
| $ | 482 |
| $ | — |
| $ | — |
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3.2% senior notes due October 1, 2026 | | $ | 497 | | $ | 491 | | $ | 496 | | $ | 462 | | |||||||||||||
4.625% senior notes, due November 1, 2020 |
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| 398 |
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| 428 |
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| 398 |
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| 420 |
| | | 400 | | | 399 | | | 399 | | | 409 | |
1.8% senior notes, due September 25, 2017 |
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| 299 |
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| 301 |
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| 299 |
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| 300 |
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6.625% senior notes, due April 15, 2037 |
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| 254 |
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| 299 |
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| 254 |
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| 302 |
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| 253 | |
| 246 | |
| 254 | |
| 295 | |
6.0% senior notes, due April 15, 2017 |
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| 200 |
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| 202 |
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| 200 |
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| 211 |
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5.62% senior notes, due March 25, 2020 |
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| 200 |
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| 217 |
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| 200 |
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| 218 |
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| 200 | |
| 200 | |
| 200 | |
| 205 | |
U.S. revolving credit facility due October 11, 2021 |
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| — |
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| — |
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U.S. revolving credit facility replaced October 2016 |
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| — |
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| — |
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| 111 |
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| 111 |
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Term loan repaid September 2016 |
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| — |
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| — |
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| 350 |
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| 350 |
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Term loan credit agreement due April 25, 2019 | | | — | | | — | | | 165 | | | 165 | | |||||||||||||
Term loan credit agreement due April 12, 2021 | | | 405 | | | 405 | | | — | | | — | | |||||||||||||
U.S. revolving credit facility | |
| 10 | |
| 10 | |
| 418 | |
| 418 | | |||||||||||||
Fair value adjustment related to hedged fixed rate debt instruments |
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| 3 |
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| 7 |
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| — |
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| 1 | |
| — | |
| (1) | |
| — | |
Total long-term debt |
| $ | 1,850 |
| $ | 1,929 |
| $ | 1,819 |
| $ | 1,912 |
| | $ | 1,766 | | $ | 1,751 | | $ | 1,931 | | $ | 1,954 | |
A hypothetical change of 1 percentage point in interest rates would change the fair value of our fixed rate debt at December 31, 20162019, by approximately $100$71 million. Since we have no current plans to repurchase our outstanding fixed-ratefixed rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt is not expected to have a significant effect on our consolidated financial statements.
We have an interest rate swap agreementsagreement that effectively convertconverts the interest rates on our 6.0 percent $200 million senior notes due April 15, 2017, our 1.8 percent $300 million senior notes due September 25, 2017 and on $200 million of our $400 million 4.625 percent4.625% senior notes due November 1, 2020, to variable rates. TheseThis swap agreements callagreement calls for us to receive interest at the fixed coupon rate of the respective notes and to pay interest at a variable rate based on the six-month USU.S. dollar LIBOR rate plus a spread. We have designated thesethis interest rate swap agreementsagreement as hedgesa hedge of the changes in fair value of the underlying debt obligations attributable to changes in interest rates and account for themit as fair-value hedges.a fair value hedge. The fair value of thesethe interest rate swap agreements approximated $3was a $1 million loss at December 31, 20162019, and is reflected in the Consolidated Balance SheetsSheet within Other assets, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligations.
Raw Material, Energy, and Other Commodity Exposure. Exposure:Our finished products are made primarily from corn. In North America, we sell a large portion of finished products at firm prices established in supply contracts typically lasting for periods of up to one year. In order to minimize the effect of volatility in the cost of corn related to these firm-priced supply contracts, we enter into corn futures contracts or take other hedging positions in the corn futures market. These contracts typically mature within one year. At expiration, we settle the derivative contracts at a net amount equal to the difference between the then-current price of corn and the futures contract price. While these hedging instruments are subject to fluctuations in value, changes in the value of the underlying exposures we are hedging generally offset such fluctuations. While the corn futures contracts or other hedging positions are intended to minimize the volatility of corn costs on operating profits, occasionally the hedging activity can result in losses, some of which may be material. Outside of North America, sales of finished products under long-term, firm-priced supply contracts are not material.
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Energy costs represent approximately 109 percent of our operating costs.cost of sales. The primary use of energy is to create steam in the production process and to dry product. We consume coal, natural gas, electricity, wood, and fuel oil to generate energy. The market prices for these commodities vary depending on supply and demand, world economies and other factors. We purchase these commodities based on our anticipated usage and the future outlook for these costs. We cannot
49
assure that we will be able to purchase these commodities at prices that we can adequately pass on to customers to sustain or increase profitability. We use derivative financial instruments, such as over-the-counter natural gas swaps, to hedge portions of our natural gas costs generally over the following twelve12 to twenty-four24 months, primarily in our North American operations.
At December 31, 2016,2019, we had outstanding futures and option contracts that hedged the forecasted purchase of approximately 12298 million bushels of corn and 41 million pounds of soybean oil. We are unable to directly hedge price risk related to co-product sales; however, we occasionally enter into hedges of soybean oil (a competing product to corn oil) in order to mitigate the price risk of corn oil sales.corn. We also had outstanding swap and option contracts that hedged the forecasted purchase of approximately 2030 million mmbtu’s of natural gas at December 31, 2016. Additionally at December 31, 2016, we had outstanding ethanol futures contracts that hedged the forecasted sale of approximately 10 million gallons of ethanol.2019. Based on our overall commodity hedge position at December 31, 2016,2019, a hypothetical 10 percent decline in market prices applied to the fair value of the instruments would result in a charge to other comprehensive income of approximately $34$1 million, net of income tax benefit. It should be noted that anyAny change in the fair value of the contracts, real or hypothetical, would be substantially offset by an inverse change in the value of the underlying hedged item.
Foreign Currencies.Currencies: Due to our global operations, we are exposed to fluctuations in foreign currency exchange rates. As a result, we have exposure to translational foreign exchange risk when our foreign operation results are translated to USU.S. dollars and to transactional foreign exchange risk when transactions not denominated in the functional currency of the operating unit are revalued.
We selectively use derivative instruments such as forward contracts, currency swaps and options to manage transactional foreign exchange risk. Based on our overall foreign currency transactional exposure at December 31, 2016,2019, we estimate that a hypothetical 10 percent decline in the value of the USU.S. dollar would have resulted in a transactional foreign exchange gain of approximately $2$4 million. At December 31, 2016,2019, our accumulated other comprehensive loss account included in the equity section of our Consolidated Balance Sheet includes a cumulative translation loss of approximately $1.0$1.1 billion. The aggregate net assets of our foreign subsidiaries where the local currency is the functional currency approximated $1.3$1.4 billion at December 31, 2016.2019. A hypothetical 10 percent decline in the value of the USU.S. dollar relative to foreign currencies would have resulted in a reduction to our cumulative translation loss and a credit to other comprehensive income of approximately $147$157 million.
5150
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Ingredion Incorporated | | Page |
| 52 | |
| 55 | |
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| 57 | |
| 58 | |
| 59 | |
60 |
5251
Report of Independent Registered Public Accounting FirmReport
TheTo the Stockholders and Board of Directors
Ingredion Incorporated:
Opinions on the Consolidated Financial Statements and StockholdersInternal Control Over Financial Reporting
Ingredion Incorporated:
We have audited the accompanying consolidated balance sheets of Ingredion Incorporated and subsidiaries (the Company) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of income, comprehensive income (loss), equity and redeemable equity, and cash flows for each of the years in the three-year period ended December 31, 2016.2019, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2016,2019, based on criteria established in Internal Control —– Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases effective January 1, 2019 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842), and its subsequent amendments.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
52
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
In our opinion,The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements referredthat was communicated or required to above present fairly,be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in all material respects,any way our opinion on the consolidated financial positionstatements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of Ingredion Incorporatedthe pension and subsidiariesother postretirement employee benefit obligations (OPEB)
As discussed in Note 10 to the consolidated financial statements, the Company’s estimated pension benefit obligations totaled $641 million as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years2019. The Company’s OPEB includes plans in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting asUS, Brazil and Canada, which are fully unfunded liabilities. As of December 31, 2016,2019, the Company had a net liability of $69 million related to the Company’s other postretirement benefit plans. The pension and OPEB obligations are measured at the actuarial present value of the vested benefits to which employees are currently entitled based on criteria establishedthe employee’s expected date of separation or retirement. The determination of the Company’s pension and OPEB obligations is dependent, in Internal Control — Integrated Framework (2013) issuedpart, on the selection of certain estimates and actuarial assumptions, including discount rates.
We identified the evaluation of the pension and OPEB obligations to be a critical audit matter. Significant auditor judgment was required to evaluate the actuarial models and methodology used by the Committee of Sponsoring OrganizationsCompany to determine the obligations and to evaluate the discount rates used. Small changes in the discount rates would impact the measurement of the Treadway Commission (COSO).pension and OPEB obligations.
The Company acquired Shandong Huanong Specialty Corn Development Co., LTD.(“Shandong”)primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s pension and TIC Gums Incorporated (“TIC Gums”) during 2016, and management excluded from itsOPEB obligations process, including controls related
53
to the assessment of the effectivenessactuarial models and the development of the Company’s internal control over financial reporting as of December 31, 2016, Shandong’sdiscount rates. We involved an actuarial professional with specialized skill and TIC Gums’ internal control over financial reporting associated with total assets of $435 million and total net sales of $0.3 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2016. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Shandong and TIC Gums. knowledge, who assisted in:
| |
| |
| understanding and assessing the actuarial models and methodology used by the Company to determine the obligations, |
| ● | the evaluation of the Company’s discount rates, by assessing changes in the discount rates from the prior year and comparing it to the change in published indices, and evaluating the discount rates based on the pattern of cash flows; and |
| ● | the evaluation of the selected yield curve, the consistency of the yield curve with the prior year, and the spot rates, to further assess the discount rates. |
/s/ KPMG LLP
We have served as the Company’s auditor since 1997.
Chicago, IL
February 19, 2020
53
INGREDION INCORPORATED
Consolidated Statements of Income
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Years Ended December 31, |
| 2016 |
| 2015 |
| 2014 |
| |||
Net sales before shipping and handling costs |
| $ | 6,022 |
| $ | 5,958 |
| $ | 5,998 |
|
Less - shipping and handling costs |
|
| 318 |
|
| 337 |
|
| 330 |
|
Net sales |
|
| 5,704 |
|
| 5,621 |
|
| 5,668 |
|
Cost of sales |
|
| 4,302 |
|
| 4,379 |
|
| 4,553 |
|
Gross profit |
|
| 1,402 |
|
| 1,242 |
|
| 1,115 |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 579 |
|
| 555 |
|
| 525 |
|
Other (income) - net |
|
| (4) |
|
| (1) |
|
| (24) |
|
Restructuring/impairment charges |
|
| 19 |
|
| 28 |
|
| 33 |
|
|
|
| 594 |
|
| 582 |
|
| 534 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 808 |
|
| 660 |
|
| 581 |
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|
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|
|
|
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|
|
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|
|
Financing costs-net |
|
| 66 |
|
| 61 |
|
| 61 |
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|
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|
|
|
|
|
|
Income before income taxes |
|
| 742 |
|
| 599 |
|
| 520 |
|
Provision for income taxes |
|
| 246 |
|
| 187 |
|
| 157 |
|
Net income |
|
| 496 |
|
| 412 |
|
| 363 |
|
Less - Net income attributable to non-controlling interests |
|
| 11 |
|
| 10 |
|
| 8 |
|
Net income attributable to Ingredion |
| $ | 485 |
| $ | 402 |
| $ | 355 |
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|
Weighted average common shares outstanding: |
|
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|
|
|
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|
|
Basic |
|
| 72.3 |
|
| 71.6 |
|
| 73.6 |
|
Diluted |
|
| 74.1 |
|
| 73.0 |
|
| 74.9 |
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Earnings per common share of Ingredion: |
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Basic |
| $ | 6.70 |
| $ | 5.62 |
| $ | 4.82 |
|
Diluted |
|
| 6.55 |
|
| 5.51 |
|
| 4.74 |
|
See notes to the consolidated financial statements.
54
INGREDION INCORPORATED
Ingredion Incorporated (“Ingredion”)
Consolidated Statements of Comprehensive IncomeIncome
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Years Ended December 31, |
| 2016 |
| 2015 |
| 2014 |
| |||
Net income |
| $ | 496 |
| $ | 412 |
| $ | 363 |
|
Other comprehensive income (loss): |
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|
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|
Losses on cash-flow hedges, net of income tax effect of $6, $19 and $12, respectively |
|
| (11) |
|
| (42) |
|
| (29) |
|
Amount of losses on cash-flow hedges reclassified to earnings, net of income tax effect of $16, $14 and $23, respectively |
|
| 33 |
|
| 32 |
|
| 50 |
|
Actuarial gain (loss) on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $4, $5 and $5, respectively |
|
| (10) |
|
| 13 |
|
| (12) |
|
Losses related to pension and other postretirement obligations reclassified to earnings, net of income tax effect of $-, $- and $1, respectively |
|
| 1 |
|
| 1 |
|
| 4 |
|
Unrealized gain on investments, net of income tax effect |
|
| 1 |
|
| — |
|
| — |
|
Currency translation adjustment |
|
| 7 |
|
| (324) |
|
| (212) |
|
Comprehensive income |
| $ | 517 |
| $ | 92 |
| $ | 164 |
|
Less: Comprehensive income attributable to non-controlling interests |
|
| 12 |
|
| 10 |
|
| 8 |
|
Comprehensive income attributable to Ingredion |
| $ | 505 |
| $ | 82 |
| $ | 156 |
|
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, | |||||||
(in millions, except per share amounts) | | 2019 |
| 2018 |
| 2017 | |||
Net sales | | $ | 6,209 |
| $ | 6,289 |
| $ | 6,244 |
Cost of sales | | | 4,897 | | | 4,921 | | | 4,772 |
Gross profit | | | 1,312 | | | 1,368 | | | 1,472 |
| | | | | | | | | |
Operating expenses | | | 610 | | | 611 | | | 616 |
Other income, net | | | (19) | | | (10) | | | (18) |
Restructuring/impairment charges | | | 57 | | | 64 | | | 38 |
| | | | | | | | | |
Operating income | | | 664 | | | 703 | | | 836 |
| | | | | | | | | |
Financing costs, net | | | 81 | | | 86 | | | 73 |
Other, non-operating expense (income), net | | | 1 | | | (4) | | | (6) |
| | | | | | | | | |
Income before income taxes | | | 582 | | | 621 | | | 769 |
Provision for income taxes | | | 158 | | | 167 | | | 237 |
Net income | | | 424 | | | 454 | | | 532 |
Less: Net income attributable to non-controlling interests | | | 11 | | | 11 | | | 13 |
Net income attributable to Ingredion | | $ | 413 | | $ | 443 | | $ | 519 |
| | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | |
Basic | | | 66.9 | | | 70.9 | | | 72.0 |
Diluted | | | 67.4 | | | 71.8 | | | 73.5 |
| | | | | | | | | |
Earnings per common share of Ingredion: | | | | | | | | | |
Basic | | $ | 6.17 | | $ | 6.25 | | $ | 7.21 |
Diluted | | | 6.13 | | | 6.17 | | | 7.06 |
See notesthe Notes to the consolidated financial statements.Consolidated Financial Statements.
55
Ingredion Incorporated (“Ingredion”)
Consolidated Statements of Comprehensive Income (Loss)
INGREDION INCORPORATED
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(in millions) |
| 2019 |
| 2018 |
| 2017 | |||
Net income | | $ | 424 |
| $ | 454 |
| $ | 532 |
Other comprehensive income: | | | | | | | | | |
(Losses) gains on cash flow hedges, net of income tax effect of $5, $2, and $6, respectively | | | (14) | | | 6 | | | (10) |
Losses on cash flow hedges reclassified to earnings, net of income tax effect of $4, $2, and $2, respectively | | | 10 | | | 4 | | | 4 |
Actuarial gains (losses) on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $2, $5, and $2, respectively | | | 9 | | | (15) | | | 6 |
Gains related to pension and other postretirement obligations reclassified to earnings, net of income tax effect of $ — , $ — , and $1, respectively | | | — | | | — | | | (1) |
Unrealized gains on investments, net of income tax effect of $ — , $ — , and $1, respectively | | | — | | | — | | | 2 |
Currency translation adjustment | | | (9) | | | (129) | | | 57 |
Comprehensive income | | | 420 | | | 320 | | | 590 |
Less: Comprehensive income attributable to non-controlling interests | | | 9 | | | 3 | | | 13 |
Comprehensive income attributable to Ingredion | | $ | 411 | | $ | 317 | | $ | 577 |
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As of December 31, |
| 2016 |
| 2015 |
| ||
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Assets |
|
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Current assets: |
|
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Cash and cash equivalents |
| $ | 512 |
| $ | 434 |
|
Short-term investments |
|
| 4 |
|
| 6 |
|
Accounts receivable — net |
|
| 923 |
|
| 775 |
|
Inventories |
|
| 789 |
|
| 715 |
|
Prepaid expenses |
|
| 24 |
|
| 20 |
|
Total current assets |
|
| 2,252 |
|
| 1,950 |
|
Property, plant and equipment, at cost |
|
|
|
|
|
|
|
Land |
|
| 183 |
|
| 171 |
|
Buildings |
|
| 704 |
|
| 643 |
|
Machinery and equipment |
|
| 4,055 |
|
| 3,817 |
|
|
|
| 4,942 |
|
| 4,631 |
|
Less: accumulated depreciation |
|
| (2,826) |
|
| (2,642) |
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|
|
|
|
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|
Property, plant and equipment - net |
|
| 2,116 |
|
| 1,989 |
|
Goodwill |
|
| 784 |
|
| 601 |
|
Other intangible assets - net of accumulated amortization of $106 and $82, respectively |
|
| 502 |
|
| 410 |
|
Deferred income tax assets |
|
| 7 |
|
| 7 |
|
Other assets |
|
| 121 |
|
| 117 |
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Total assets |
| $ | 5,782 |
| $ | 5,074 |
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Liabilities and equity |
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|
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Current liabilities: |
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|
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|
|
|
Short-term borrowings |
| $ | 106 |
| $ | 19 |
|
Accounts payable |
|
| 440 |
|
| 423 |
|
Accrued liabilities |
|
| 432 |
|
| 300 |
|
Total current liabilities |
|
| 978 |
|
| 742 |
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
| 158 |
|
| 170 |
|
Long-term debt |
|
| 1,850 |
|
| 1,819 |
|
Deferred income tax liabilities |
|
| 171 |
|
| 139 |
|
Share-based payments subject to redemption |
|
| 30 |
|
| 24 |
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Ingredion stockholders’ equity |
|
|
|
|
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|
|
Preferred stock — authorized 25,000,000 shares-$0.01 par value, none issued |
|
| — |
|
| — |
|
Common stock — authorized 200,000,000 shares-$0.01 par value, 77,810,875 issued at December 31, 2016 and December 31, 2015, respectively |
|
| 1 |
|
| 1 |
|
Additional paid-in capital |
|
| 1,149 |
|
| 1,160 |
|
Less - Treasury stock (common stock: 5,396,526 and 6,194,510 shares at December 31, 2016 and December 31, 2015, respectively) at cost |
|
| (413) |
|
| (467) |
|
Accumulated other comprehensive loss |
|
| (1,071) |
|
| (1,102) |
|
Retained earnings |
|
| 2,899 |
|
| 2,552 |
|
Total Ingredion stockholders’ equity |
|
| 2,565 |
|
| 2,144 |
|
Non-controlling interests |
|
| 30 |
|
| 36 |
|
Total equity |
|
| 2,595 |
|
| 2,180 |
|
Total liabilities and equity |
| $ | 5,782 |
| $ | 5,074 |
|
See notesthe Notes to the consolidated financial statements.Consolidated Financial Statements.
56
Ingredion Incorporated (“Ingredion”)
Consolidated Balance Sheets
| | | | | | | |
| | As of December 31, | | ||||
(in millions, except share and per share amounts) |
| 2019 |
| 2018 |
| ||
Assets | | | |
| | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 264 | | $ | 327 | |
Short-term investments | | | 4 | | | 7 | |
Accounts receivable, net | | | 977 | | | 951 | |
Inventories | | | 861 | | | 824 | |
Prepaid expenses | | | 54 | | | 29 | |
Total current assets | | | 2,160 | | | 2,138 | |
| | | | | | | |
Property, plant and equipment, net of accumulated depreciation of $3,056 and $2,915, respectively | | | 2,306 | | | 2,198 | |
| | | | | | | |
Goodwill | | | 801 | | | 791 | |
Other intangible assets, net of accumulated amortization of $197 and $167, respectively | | | 437 | | | 460 | |
Operating lease assets | | | 151 | | | — | |
Deferred income tax assets | | | 13 | | | 10 | |
Other assets | | | 172 | | | 131 | |
Total assets | | $ | 6,040 | | $ | 5,728 | |
| | | | | | | |
Liabilities and equity | | | | | | | |
Current liabilities: | | | | | | | |
Short-term borrowings | | $ | 82 | | $ | 169 | |
Accounts payable | | | 504 | | | 452 | |
Accrued liabilities | | | 381 | | | 325 | |
Total current liabilities | | | 967 | | | 946 | |
| | | | | | | |
Non-current liabilities | | | 220 | | | 217 | |
Long-term debt | | | 1,766 | | | 1,931 | |
Non-current operating lease liabilities | | | 120 | | | — | |
Deferred income tax liabilities | | | 195 | | | 189 | |
Share-based payments subject to redemption | | | 31 | | | 37 | |
| | | | | | | |
Ingredion stockholders’ equity: | | | | | | | |
Preferred stock — authorized 25,000,000 shares — $0.01 par value, NaN issued | | | — | | | — | |
Common stock — authorized 200,000,000 shares — $0.01 par value, 77,810,875 issued at December 31, 2019 and 2018, respectively | | | 1 | | | 1 | |
Additional paid-in capital | | | 1,137 | | | 1,096 | |
Less: Treasury stock (common stock: 10,993,388 and 11,284,681 shares at December 31, 2019 and 2018, respectively) at cost | | | (1,040) | | | (1,091) | |
Accumulated other comprehensive loss | | | (1,158) | | | (1,154) | |
Retained earnings | | | 3,780 | | | 3,536 | |
Total Ingredion stockholders’ equity | | | 2,720 | | | 2,388 | |
Non-controlling interests | | | 21 | | | 20 | |
Total equity | | | 2,741 | | | 2,408 | |
Total liabilities and equity | | $ | 6,040 | | $ | 5,728 | |
See the Notes to the Consolidated Financial Statements.
57
INGREDION INCORPORATEDIngredion Incorporated (“Ingredion”)
Consolidated Statements of Equity and Redeemable Equity
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| Total Equity |
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| Additional |
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| Accumulated Other |
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| Non- |
| Payments |
| ||||
|
| Common |
| Paid-In |
| Treasury |
| Comprehensive |
| Retained |
| Controlling |
| Subject |
| |||||||
(in millions) |
| Stock |
| Capital |
| Stock |
| Income (Loss) |
| Earnings |
| Interests |
| Redemption |
| |||||||
Balance, December 31, 2013 |
| $ | 1 |
| $ | 1,166 |
| $ | (225) |
| $ | (583) |
| $ | 2,045 |
| $ | 25 |
| $ | 24 |
|
Net income attributable to Ingredion |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 355 |
|
|
|
|
|
|
|
Net income attributable to non-controlling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8 |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (125) |
|
| (3) |
|
|
|
|
Repurchases of common stock |
|
|
|
|
| (3) |
|
| (301) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock on exercise of stock options |
|
|
|
|
| (17) |
|
| 37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense |
|
|
|
|
| 7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other share-based compensation |
|
|
|
|
| 5 |
|
| 8 |
|
|
|
|
|
|
|
|
|
|
| (2) |
|
Excess tax benefit on share-based compensation |
|
|
|
|
| 6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
| (199) |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014 |
| $ | 1 |
| $ | 1,164 |
| $ | (481) |
| $ | (782) |
| $ | 2,275 |
| $ | 30 |
| $ | 22 |
|
Net income attributable to Ingredion |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 402 |
|
|
|
|
|
|
|
Net income attributable to non-controlling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10 |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (125) |
|
| (4) |
|
|
|
|
Repurchases of common stock |
|
|
|
|
| (7) |
|
| (34) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock on exercise of stock options |
|
|
|
|
| (14) |
|
| 35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense |
|
|
|
|
| 7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other share-based compensation |
|
|
|
|
| 2 |
|
| 13 |
|
|
|
|
|
|
|
|
|
|
| 2 |
|
Excess tax benefit on share-based compensation |
|
|
|
|
| 8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
| (320) |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015 |
| $ | 1 |
| $ | 1,160 |
| $ | (467) |
| $ | (1,102) |
| $ | 2,552 |
| $ | 36 |
| $ | 24 |
|
Net income attributable to Ingredion |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 485 |
|
|
|
|
|
|
|
Net income attributable to non-controlling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11 |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (138) |
|
| (7) |
|
|
|
|
Repurchases of common stock |
|
|
|
|
| (8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock on exercise of stock options |
|
|
|
|
| (14) |
|
| 43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense |
|
|
|
|
| 9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other share-based compensation |
|
|
|
|
| 2 |
|
| 11 |
|
|
|
|
|
|
|
|
|
|
| 6 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 31 |
|
|
|
|
| (10) |
|
|
|
|
Balance, December 31, 2016 |
| $ | 1 |
| $ | 1,149 |
| $ | (413) |
| $ | (1,071) |
| $ | 2,899 |
| $ | 30 |
| $ | 30 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Equity | | Share-based | | ||||||||||||||||||||
| | | | | | | | Additional | | | | | Accumulated Other | | | | | Non- | | Payments | | ||||
| | Preferred | | Common | | Paid-In | | Treasury | | Comprehensive | | Retained | | Controlling | | Subject to | | ||||||||
(in millions) |
| Stock | | Stock |
| Capital |
| Stock |
| Loss |
| Earnings |
| Interests |
| Redemption |
| ||||||||
Balance, December 31, 2016 | | $ | — | | $ | 1 |
| $ | 1,149 |
| $ | (413) |
| $ | (1,071) |
| $ | 2,899 |
| $ | 30 |
| $ | 30 | |
Net income attributable to Ingredion | | | | | | | | | | | | | | | | | | 519 | | | | | | | |
Net income attributable to non-controlling interests | | | | | | | | | | | | | | | | | | | | | 13 | | | | |
Dividends declared | | | | | | | | | | | | | | | | | | (159) | | | (15) | | | | |
Repurchases of common stock | | | | | | | | | | | | (123) | | | | | | | | | | | | | |
Share-based compensation, net of issuance | | | | | | | | | (11) | | | 42 | | | | | | | | | | | | 6 | |
Other comprehensive income (loss) | | | | | | | | | | | | | | | 58 | | | | | | (2) | | | | |
Balance, December 31, 2017 | | | — | | | 1 |
| | 1,138 |
| | (494) |
| | (1,013) |
| | 3,259 |
| | 26 |
| | 36 | |
Net income attributable to Ingredion | | | | | | | | | | | | | | | | | | 443 | | | | | | | |
Net income attributable to non-controlling interests | | | | | | | | | | | | | | | | | | | | | 11 | | | | |
Dividends declared | | | | | | | | | | | | | | | | | | (173) | | | (9) | | | | |
Repurchases of common stock | | | | | | | | | (33) | | | (624) | | | | | | | | | | | | | |
Share-based compensation, net of issuance | | | | | | | | | (5) | | | 27 | | | | | | | | | | | | 1 | |
Other comprehensive loss | | | | | | | | | | | | | | | (134) | | | | | | (7) | | | | |
Other | | | | | | | | | (4) | | | | | | (7) | | | 7 | | | (1) | | | | |
Balance, December 31, 2018 | | | — | | | 1 | | | 1,096 | | | (1,091) | | | (1,154) | | | 3,536 | | | 20 | | | 37 | |
Net income attributable to Ingredion | | | | | | | | | | | | | | | | | | 413 | | | | | | | |
Net income attributable to non-controlling interests | | | | | | | | | | | | | | | | | | | | | 11 | | | | |
Dividends declared | | | | | | | | | | | | | | | | | | (169) | | | (8) | | | | |
Repurchases of common stock, net | | | | | | | | | 32 | | | 31 | | | | | | | | | | | | | |
Share-based compensation, net of issuance | | | | | | | | | 9 | | | 20 | | | | | | | | | | | | (6) | |
Other comprehensive loss | | | | | | | | | | | | | | | (4) | | | | | | (2) | | | | |
Balance, December 31, 2019 | | $ | — | | $ | 1 | | $ | 1,137 | | $ | (1,040) | | $ | (1,158) | | $ | 3,780 | | $ | 21 | | $ | 31 | |
See notesthe Notes to the consolidated financial statementsConsolidated Financial Statements.
5758
Ingredion Incorporated (“Ingredion”)
INGREDION INCORPORATED
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
| 2016 |
| 2015 |
| 2014 |
| |||
Cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 496 |
| $ | 412 |
| $ | 363 |
|
Non-cash charges to net income: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 196 |
|
| 194 |
|
| 195 |
|
Deferred income taxes |
|
| (5) |
|
| (6) |
|
| (11) |
|
Write-off of impaired assets |
|
| — |
|
| 10 |
|
| 33 |
|
Gain on sale of plant |
|
| — |
|
| (10) |
|
| — |
|
Charge for fair value mark-up of acquired inventory |
|
| — |
|
| 10 |
|
| — |
|
Other |
|
| 101 |
|
| 96 |
|
| 68 |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in working capital: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable and prepaid expenses |
|
| (131) |
|
| (29) |
|
| (15) |
|
Inventories |
|
| (19) |
|
| 9 |
|
| (6) |
|
Accounts payable and accrued liabilities |
|
| 127 |
|
| 30 |
|
| 66 |
|
Margin accounts |
|
| 15 |
|
| (34) |
|
| 39 |
|
Other |
|
| (9) |
|
| 4 |
|
| (1) |
|
Cash provided by operating activities |
|
| 771 |
|
| 686 |
|
| 731 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities: |
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions, net of cash acquired of $4, $16, and $-, respectively |
|
| (407) |
|
| (434) |
|
| — |
|
Capital expenditures |
|
| (284) |
|
| (280) |
|
| (276) |
|
Investment in non-consolidated affiliate |
|
| (2) |
|
| — |
|
| — |
|
Short-term investments |
|
| 1 |
|
| 27 |
|
| (34) |
|
Proceeds from disposal of plants and properties |
|
| 3 |
|
| 38 |
|
| 5 |
|
Proceeds from sale of investment |
|
| — |
|
| — |
|
| 11 |
|
Cash used for investing activities |
|
| (689) |
|
| (649) |
|
| (294) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) financing activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
| 1,000 |
|
| 1,388 |
|
| 231 |
|
Payments on debt |
|
| (874) |
|
| (1,366) |
|
| (213) |
|
Debt issuance costs |
|
| (6) |
|
| — |
|
| — |
|
Repurchases of common stock |
|
| (8) |
|
| (41) |
|
| (304) |
|
Issuance of common stock |
|
| 29 |
|
| 21 |
|
| 20 |
|
Dividends paid (including to non-controlling interests) |
|
| (141) |
|
| (126) |
|
| (128) |
|
Excess tax benefit on share-based compensation |
|
| — |
|
| 8 |
|
| 6 |
|
Cash used for financing activities |
|
| — |
|
| (116) |
|
| (388) |
|
|
|
|
|
|
|
|
|
|
|
|
Effects of foreign exchange rate changes on cash |
|
| (4) |
|
| (67) |
|
| (43) |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
| 78 |
|
| (146) |
|
| 6 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
| 434 |
|
| 580 |
|
| 574 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
| $ | 512 |
| $ | 434 |
| $ | 580 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| | Year Ended December 31, | | |||||||
(in millions) | | 2019 |
| 2018 |
| 2017 |
| |||
Cash provided by operating activities | | | | | | | | | | |
Net income | | $ | 424 | | $ | 454 | | $ | 532 | |
Non-cash charges to net income: | | | | | | | | | | |
Depreciation and amortization | | | 220 | | | 247 | | | 209 | |
Mechanical stores expense | | | 57 | | | 57 | | | 57 | |
Deferred income taxes | | | 3 | | | (23) | | | 67 | |
Charge for fair value markup of acquired inventory | | | — | | | — | | | 9 | |
Other | | | 33 | | | 39 | | | 39 | |
Changes in working capital: | | | | | | | | | | |
Accounts receivable and prepaid expenses | | | (61) | | | (70) | | | (44) | |
Inventories | | | (43) | | | (50) | | | (34) | |
Accounts payable and accrued liabilities | | | 51 | | | (3) | | | (49) | |
Margin accounts | | | (1) | | | 5 | | | 6 | |
Other | | | (3) | | | 47 | | | (23) | |
Cash provided by operating activities | | | 680 | | | 703 | | | 769 | |
| | | | | | | | | | |
Cash used for investing activities | | | | | | | | | | |
Capital expenditures and mechanical stores purchases | | | (328) | | | (350) | | | (314) | |
Payments for acquisitions, net of cash acquired of $4, $ — , and $ — , respectively | | | (42) | | | — | | | (17) | |
Investment in non-consolidated affiliates | | | (10) | | | (15) | | | — | |
Short-term investments | | | 3 | | | 1 | | | (3) | |
Proceeds from disposal of plants and properties | | | 2 | | | 1 | | | 8 | |
Other | | | 1 | | | 2 | | | — | |
Cash used for investing activities | | | (374) | | | (361) | | | (326) | |
| | | | | | | | | | |
Cash used for financing activities | | | | | | | | | | |
Proceeds from borrowings | | | 1,209 | | | 987 | | | 1,144 | |
Payments on debt | | | (1,465) | | | (738) | | | (1,240) | |
Repurchases of common stock, net | | | 63 | | | (657) | | | (123) | |
Issuances of common stock for share-based compensation, net of settlements | | | 3 | | | 1 | | | 9 | |
Dividends paid, including to non-controlling interests | | | (174) |
| | (182) |
| | (165) | |
Cash used for financing activities | | | (364) | | | (589) | | | (375) | |
| | | | | | | | | | |
Effects of foreign exchange rate changes on cash | | | (5) | | | (21) | | | 15 | |
| | | | | | | | | | |
(Decrease) increase in cash and cash equivalents | | | (63) | | | (268) | | | 83 | |
| | | | | | | | | | |
Cash and cash equivalents, beginning of period | | | 327 | | | 595 | | | 512 | |
| | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 264 | | $ | 327 | | $ | 595 | |
See notesthe Notes to the consolidated financial statements.Consolidated Financial Statements.
5859
Ingredion Incorporated (“Ingredion”)
Notes to Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Description of the Business
Ingredion Incorporated (“the(individually and together with its consolidated subsidiaries, “the Company”) was founded in 1906 and became an independent and public company as of December 31, 1997. The Company primarily manufactures and sells sweetener,sweeteners, starches, nutrition ingredients, and biomaterial solutions derived from the wet milling and processing of corn and other starch-based materials to a wide range of industries, both domestically and internationally.
NOTE 2 – Summary of Significant Accounting Policies
Basis of presentation --: The consolidated financial statements consist of the accounts of the Company, including all significant subsidiaries. Intercompany accounts and transactions are eliminated in consolidation.
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of AmericaU.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the value of purchase consideration, valuation of accounts receivable, inventories, goodwill, intangible assets and other long-lived assets, legal contingencies, guarantee obligations, and assumptions used in the calculation of income taxes, and pension and other postretirement benefits, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management will adjust such estimates and assumptions when facts and circumstances dictate. Foreign currency devaluations, corn price volatility, access to difficult credit markets, and adverse changes in the global economic environment have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the financial statements in future periods.
Assets and liabilities of foreign subsidiaries, other than those whose functional currency is the USU.S. dollar, are translated at current exchange rates with the related translation adjustments reported in equity as a component of accumulated other comprehensive income (loss). The US dollar is the functional currency for the Company’s Mexico subsidiary. Income statement accounts are translated at the average exchange rate during the period. However, significant nonrecurringnon-recurring items related to a specific event are recognized at the exchange rate on the date of the significant event. The U.S. dollar is the functional currency for the Company’s subsidiaries in Mexico and as of July 1, 2018, in Argentina. In the second quarter of 2018, the Argentine peso rapidly devalued relative to the U.S. dollar, which along with increased inflation, resulted in a three-year cumulative inflation that exceeded 100 percent, as of June 30, 2018. As a result, the Company elected to adopt highly inflationary accounting as of July 1, 2018, for its Argentina affiliate in accordance with GAAP. Under highly inflationary accounting, the Argentina affiliate’s functional currency becomes the U.S. dollar. For foreign subsidiaries where the USU.S. dollar is the functional currency, monetary assets and liabilities are translated at current exchange rates with the related adjustment included in net income. Non-monetary assets and liabilities are translated at historical exchange rates. Although the Company hedges the predominance of its transactional foreign exchange risk (see Note 6), the Company incurs foreign currency transaction gains/losses relating to assets and liabilities that are denominated in a currency other than the functional currency. For 2016, 2015 and 2014, the Company incurred foreign currency transaction losses of $3 million, $6 million and $1 million, respectively. The Company’s accumulated other comprehensive loss included in equity on the Consolidated Balance Sheets includes cumulative translation losses of approximately $1 billion at both December 31, 2016 and 2015.
Cash and cash equivalents --equivalents: Cash equivalents consist of all instruments purchased with an original maturity of three months or less, and which have virtually no risk of loss in value.
Inventories --Accounts receivable, net: Accounts receivable, net, consist of trade and other receivables carried at approximate fair value, net of an allowance for doubtful accounts based on specific identification of material amounts at risk and a general reserve based on historical collection experience.
Inventories: Inventories are stated at the lower of cost or net realizable value. Costs are predominantly determined using the weighted average method.
Investments:Investments -- Investmentsare included in Other assets in the common stockConsolidated Balance Sheets. The Company holds equity and cost method investments, and marketable securities as of affiliated companies overDecember 31, 2019. Investments in which the Company does not exercise significant influence are accounted for under the cost method. In 2016, the Company invested $2 million in SweeGen Inc. which it accounts for under the cost method. In 2014, the Company sold an investment that it had accounted for under the cost method. The Company received $11 million in cash and recorded a pre-tax gain of $5 million from the sale. Investments that enable the Companyis able to exercise significant influence, but do not represent a controlling interest, are accounted for under the equity method; such investments are carried at cost, adjusted to reflect the Company’s proportionate share of income or
60
loss, less dividends received. TheInvestments in the common stock of affiliated companies over which the Company diddoes not have any investmentsexercise significant influence are accounted
59
for under the equity method at December 31, 2016 or 2015.cost method. The Company has equity interests in the CME Group Inc. and CBOE Holdings, Inc., which are classified as available for sale securities. The investmentsmarketable securities are carried at fair value with unrealized gains and losses recorded to other comprehensive income. The Company would recognize a loss on its investments when there is a lossOther income, net in value of an investment that is other than temporary. Investments are included in Other assets in the Consolidated Balance Sheets and are not significant. accordance with Accounting Standards Codification (“ASC”) 825.
Leases--Leases: The Company leases rail cars, office space, and certain machinery and equipment, and office space.equipment. The Company determines if an arrangement is a lease at inception of the agreement and classifies its leases as either capital or operating based on the terms of the related lease agreement and the criteria contained in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)ASC Topic 840, 842, Leases, and related interpretations. See also Note 8 of the Notes to the Consolidated Financial Statements for additional information.
Property, plant and equipment and depreciation -- depreciation:Property, plant and equipment (“PP&E”) are stated at cost less accumulated depreciation. Depreciation is generally computed on the straight-line methodbasis over the estimated useful lives of depreciable assets, which range from 25 to 50 years for buildings and from 2two to 25 years for all other assets. Where permitted by law, accelerated depreciation methods are used for tax purposes. The Company recognized depreciation expense of $191 million, $217 million, and $179 million for the years ended December 31, 2019, 2018, and 2017, respectively. The Company reviews the recoverability of the net book value of PP&E for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition.recoverable. If this review indicates that the carrying values will not be recovered, the carrying values would be reduced to fair value and an impairment loss would be recognized. As required under accounting principles generally accepted in the United States,GAAP, the impairment analysis for long-lived assets occurs before the goodwill impairment assessment described below.No PP&E impairment was recognized in the year ended December 31, 2019 related to the Company’s annual impairment testing.
The following table summarizes the Company’s PP&E and accumulated depreciation for the periods presented:
| | | | | | | |
| | As of December 31, | | ||||
(in millions) | | 2019 |
| 2018 | | ||
Property, plant and equipment: | | | | | | | |
Land | | $ | 202 | | $ | 199 | |
Buildings | | | 748 | | | 715 | |
Machinery and equipment | | | 4,412 | | | 4,199 | |
Property, plant and equipment, at cost | | | 5,362 | | | 5,113 | |
Accumulated depreciation | | | (3,056) | | | (2,915) | |
Property, plant and equipment, net | | $ | 2,306 | | $ | 2,198 | |
Goodwill and other intangible assets -- assets:Goodwill ($784801 million and $601$791 million at December 31, 20162019 and 2015,2018, respectively) represents the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. The Company also has other intangible assets of $502$437 million and $410$460 million at December 31, 20162019 and 2015,2018, respectively. The original carrying amountvalue of goodwill and accumulated impairment charges by reportable business segment at December 31, 2016 and 20152019 was as follows:
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| North |
| South |
| Asia |
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| | North | | South | | Asia- | | | | | | | | |||||||||||||||||||
(in millions) |
| America |
| America |
| Pacific |
| EMEA |
| Total |
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| America |
| America |
| Pacific |
| EMEA |
| Total |
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Balance at December 31, 2013 |
| $ | 278 |
| $ | 78 |
| $ | 97 |
| $ | 82 |
| $ | 535 |
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Impairment charges |
|
| — |
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| (33) |
|
| — |
|
| — |
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| (33) |
| ||||||||||||||||
Currency translation |
|
| — |
|
| (13) |
|
| (4) |
|
| (7) |
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| (24) |
| ||||||||||||||||
Balance at December 31, 2014 |
| $ | 278 |
| $ | 32 |
| $ | 93 |
| $ | 75 |
| $ | 478 |
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Acquisitions |
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| 148 |
|
| — |
|
| — |
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| — |
|
| 148 |
| ||||||||||||||||
Disposal |
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| (2) |
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| — |
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| — |
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| — |
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| (2) |
| ||||||||||||||||
Currency translation |
|
| — |
|
| (10) |
|
| (7) |
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| (6) |
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| (23) |
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Balance at December 31, 2015 |
| $ | 424 |
| $ | 22 |
| $ | 86 |
| $ | 69 |
| $ | 601 |
| ||||||||||||||||
Goodwill before impairment charges | | $ | 601 | | $ | 59 | | $ | 228 | | $ | 70 | | $ | 958 | | ||||||||||||||||
Accumulated impairment charges | | | (1) | | | (33) | | | (121) | | | — | | | (155) | | ||||||||||||||||
Balance at January 1, 2018 | | | 600 | | | 26 | | | 107 | | | 70 | | | 803 | | ||||||||||||||||
Acquisitions |
|
| 186 |
|
| — |
|
| — |
|
| — |
|
| 186 |
| | | — | | | — | | | — | | | — | | | — | |
Currency translation |
|
| — |
|
| 4 |
|
| (1) |
|
| (6) |
|
| (3) |
| | | — | | | (4) | | | (3) | | | (5) | | | (12) | |
Balance at December 31, 2016 |
| $ | 610 |
| $ | 26 |
| $ | 85 |
| $ | 63 |
| $ | 784 |
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Goodwill before impairment charges |
| $ | 425 |
| $ | 55 |
| $ | 207 |
| $ | 69 |
| $ | 756 |
| ||||||||||||||||
Accumulated impairment charges |
|
| (1) |
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| (33) |
|
| (121) |
|
| — |
|
| (155) |
| ||||||||||||||||
Balance at December 31, 2015 |
| $ | 424 |
| $ | 22 |
| $ | 86 |
| $ | 69 |
| $ | 601 |
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Goodwill before impairment charges |
| $ | 611 |
| $ | 59 |
| $ | 206 |
| $ | 63 |
| $ | 939 |
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Accumulated impairment charges |
|
| (1) |
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| (33) |
|
| (121) |
|
| — |
|
| (155) |
| ||||||||||||||||
Balance at December 31, 2016 |
| $ | 610 |
| $ | 26 |
| $ | 85 |
| $ | 63 |
| $ | 784 |
| ||||||||||||||||
Balance at December 31, 2018 | | | 600 | | | 22 | | | 104 | | | 65 | | | 791 | | ||||||||||||||||
Acquisitions | | | 7 | | | — | | | — | | | — | | | 7 | | ||||||||||||||||
Currency translation | | | — | | | (1) | | | 4 | | | — | | | 3 | | ||||||||||||||||
Balance at December 31, 2019 | | $ | 607 | | $ | 21 | | $ | 108 | | $ | 65 | | $ | 801 | | ||||||||||||||||
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The following table summarizes the Company’s other intangible assets for the periods presented:
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| As of December 31, 2016 |
| As of December 31, 2015 |
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| Weighted |
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| Weighted |
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| Average |
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| Average |
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| Useful |
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| Useful |
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| Accumulated |
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| Life |
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| Accumulated |
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| Life |
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| | As of December 31, 2019 | ||||||||||||||||||||||||||||||||
(in millions) |
| Gross |
| Amortization |
| Net |
| (years) |
| Gross |
| Amortization |
| Net |
| (years) |
|
| Gross |
| Accumulated Amortization |
| Net |
| Weighted Average Useful Life (years) | |||||||||
Trademarks/tradenames |
| $ | 143 |
| $ | — |
| $ | 143 |
| — |
| $ | 144 |
| $ | — |
| $ | 144 |
| — |
| |||||||||||
Trademarks/tradenames (indefinite-lived) |
| $ | 178 |
| $ | — |
| $ | 178 |
| — | |||||||||||||||||||||||
Customer relationships |
|
| 227 |
|
| (42) |
|
| 185 |
| 20 |
|
| 235 |
|
| (32) |
|
| 203 |
| 25 |
| | | 333 | | | (93) | | | 240 | | 20 |
Technology |
|
| 100 |
|
| (57) |
|
| 43 |
| 10 |
|
| 99 |
|
| (45) |
|
| 54 |
| 10 |
| | | 103 | | | (91) | | | 12 | | 9 |
TIC Gums intangible assets (preliminary) |
|
| 117 |
|
| — |
|
| 117 |
| Various |
|
| — |
|
| — |
|
| — |
| — |
| |||||||||||
Other |
|
| 21 |
|
| (7) |
|
| 14 |
| 16 |
|
| 14 |
|
| (5) |
|
| 9 |
| 8 |
| | | 20 | | | (13) | | | 7 | | 15 |
Total other intangible assets |
| $ | 608 |
| $ | (106) |
| $ | 502 |
| 17 |
| $ | 492 |
| $ | (82) |
| $ | 410 |
| 19 |
| | $ | 634 | | $ | (197) | | $ | 437 | | 17 |
| | | | | | | | | | | | |||||||||||||||||||||||
| | As of December 31, 2018 | ||||||||||||||||||||||||||||||||
(in millions) | | Gross |
| Accumulated Amortization |
| Net |
| Weighted Average Useful Life (years) | ||||||||||||||||||||||||||
Trademarks/tradenames (indefinite-lived) | | $ | 178 |
| $ | — |
| $ | 178 |
| — | |||||||||||||||||||||||
Customer relationships | | | 325 | | | (77) | | | 248 | | 20 | |||||||||||||||||||||||
Technology | | | 103 | | | (80) | | | 23 | | 9 | |||||||||||||||||||||||
Other | | | 21 | | | (10) | | | 11 | | 16 | |||||||||||||||||||||||
Total other intangible assets | | $ | 627 | | $ | (167) | | $ | 460 | | 18 | |||||||||||||||||||||||
On December 29, 2016, the Company completed its acquisition of TIC Gums Incorporated (“TIC Gums”). A preliminary allocation of the purchase price to the assets acquired and liabilities assumed was made based on available information and incorporating management’s best estimates. The table above includes the preliminary allocation of both definite –lived and indefinite intangible assets. See Note 3 of the notes to the consolidated financial statements for additional information.
For definite-livedDefinite-lived intangible assets are stated at cost less accumulated amortization. Amortization is computed on the Company recognizesstraight-line basis over the cost of such amortizable assets in operations over their estimated useful lives of definite-lived intangible assets. Amortization expense related to intangible assets was $29 million, $30 million, and evaluates$30 million for the years ended December 31, 2019, 2018, and 2017, respectively. The Company reviews the recoverability of the net book value of definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assetsan asset may not be recoverable. Amortization expense relatedIf this review indicates that the carrying values will not be recovered, the carrying values would be reduced to intangible assets was $25 million in 2016, $22 million in 2015,fair value and $14 million in 2014. an impairment loss would be recognized.
Based on acquisitions completed through December 31, 2016 including the preliminary purchase price allocations for TIC Gums and Shandong Huanong Specialty Corn Development Co., Ltd.,2019, intangible asset amortization expense for the next five years is shown below. The amortization is subject to change based on finalization of the purchase accounting for both acquisitions.
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| |||
| | | | |||
(in millions) |
|
|
| | | |
Year |
| Amortization Expense | | Amortization Expense | ||
2017 |
| $ | 30 | |||
2018 |
|
| 29 | |||
2019 |
|
| 29 | |||
2020 |
|
| 27 | | $ | 28 |
2021 |
|
| 18 | | | 20 |
2022 | | | 19 | |||
2023 | | | 19 | |||
2024 | | | 19 | |||
Balance thereafter | | | 154 | |||
The Company assesses goodwill and other indefinite-lived intangible assets and goodwill for impairment annually (or more frequently if impairment indicators arise). The Company has chosen to perform this annual impairment assessment as of OctoberJuly 1 of each year.
In testing indefinite-lived intangible assets for impairment, the Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is impaired. After assessing the qualitative factors, if the Company determines that it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is greater than its carrying amount, then it would not be required to compute the fair value of the indefinite-lived intangible asset. In the event the qualitative assessment leads the Company to conclude otherwise, then it would be required to determine the fair value of the indefinite-lived intangible assets and perform a quantitative impairment test in accordance with ASC Topic 350-30, General Intangibles Other than Goodwill. In performing the qualitative analysis, the Company considers various factors including net sales derived from these intangibles and certain market and industry conditions. Based on the results of its assessment, the Company concluded that as of July 1, 2019, there were 0 impairments in its indefinite-lived intangible assets.
In testing goodwill for impairment, the Company first assesses qualitative factors in determining whether it is more likely than notmore-likely-than-not that the fair value of a reporting unit is less than its carrying amount. After assessing the qualitative factors, if the Company determines that it is not more likely than notmore-likely-than-not that the fair value of a reporting unit is lessgreater than its
62
carrying amount then the Company does not perform the two-step impairment test. If the Company concludes otherwise, then it performs the first step of the two-step impairment test as described in ASC Topic 350. In the first step (“Step One”), the fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit exceeds the carrying value of its net assets, goodwill is not considered impaired and no further testing is required. If the carrying value of the net assets exceeds the fair value of the reporting unit, a second step (“Step Two”) of the impairment assessment is performed in order to determine the implied fair value of a reporting unit's goodwill. Determining the implied fair value of goodwill requires a valuation of the reporting unit's tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of its goodwill, goodwill is deemed impaired and is written down to the extent of the difference. Based on the results of the annual assessment, the Company concluded that as of OctoberJuly 1, 2016, it was more likely than not that the fair value of2019, there were 0 impairments in its reporting units was greater than their carrying value (although the $26 million of
61
goodwill at the Company’s Brazil reporting unit continues to be closely monitored due to recent trends and increased volatility experienced in this reporting unit, such as continued slow economic growth, heightened competition and possible future negative economic growth). units.
Revenue recognition: The results of the Company’s impairment testing in the fourth quarter of 2014 indicated that the estimated fair value of the Company’s Southern Cone of South America reporting unit was less than its carrying amount. Therefore, the Company recorded a non-cash impairment charge of $33 million to write-off the remaining balance of goodwillaccounts for this reporting unit in 2014.
In testing indefinite-lived intangible assets for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is impaired. After assessing the qualitative factors, if the Company determines that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, then it would not be required to compute the fair value of the indefinite-lived intangible asset. In the event the qualitative assessment leads the Company to conclude otherwise, then it would be required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment testrevenue in accordance with ASC subtopic 350-30. In performing the qualitative analysis, the Company considers various factors including net sales derivedTopic 606, Revenue from these intangibles and certain market and industry conditions. Based on the results of this qualitative assessment, the Company concluded that as of October 1, 2016, it wasContracts with Customers, which is more likely than not that the fair valuefully described in Note 4 of the indefinite-lived intangible assets was greater than their carrying value.
Revenue recognition-- The Company recognizes operating revenues at the time titleNotes to the goods and all risks of ownership transfer to the customer. This transfer is considered complete when a sales agreement is in place, delivery has occurred, pricing is fixed or determinable and collection is reasonably assured. In the case of consigned inventories, the title passes and the transfer of ownership risk occurs when the goods are used by the customer. Taxes assessed by governmental authorities and collected from customers are accounted for on a net basis and excluded from revenues.Consolidated Financial Statements.
Hedging instruments-- The Company uses derivative financial instruments principally to offset exposure to market risks arising from changes in commodity prices, foreign currency exchange rates and interest rates.instruments: Derivative financial instruments used by the Company consist of commodity futures and option contracts, forward currency contracts and options, interest rate swap agreements and treasury lock agreements. The Company enters into futures and option contracts, which are designated as hedges of specific volumes of commodities (primarily corn and natural gas) that will be purchased in a future month. These derivative financial instruments are recognized in the Consolidated Balance Sheets at fair value. The Company has also entered into interest rate swap agreements that effectively convert the interest rate on certain fixed rate debt to a variable interest rate and, on certain variable rate debt, to a fixed interest rate. The Company periodically enters into treasuryTreasury lock agreements to lock the benchmark rate for an anticipated fixed-rate borrowing.(“T-Locks”). See also Note 6 and Note 7 of the notesNotes to the consolidated financial statementsConsolidated Financial Statements for additional information.
On the date a derivative contract is entered into, the Company designates the derivative as either a hedge of variable cash flows to be paid related to interest on variable rate debt, as a hedge of market variation in the benchmark rate for a future fixed rate debt issue, as a hedge of foreign currency cash flows associated with certain forecasted commercial transactions or loans, as a hedge of certain forecasted purchases of corn, natural gas or ethanol used in the manufacturing process (“a cash-flowcash flow hedge”), or as a hedge of the fair value of certain debt obligationsfirm commitments (“a fair-valuefair value hedge”), or as a non-designated hedging instrument as defined by ASC 815, Derivatives and Hedging. This process includes linking all derivatives that are designated as fair-valuecash flow or cash-flowfair value hedges to specific assets and liabilities on the Consolidated Balance Sheet,Sheets, or to specific firm commitments or forecasted transactions. These hedges are accounted for using ASC Topic 815. For all hedging relationships, the Company documents the hedging relationships and its risk-management objective and strategy for undertaking the hedge transactions, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed and a description of the method of measuring ineffectiveness. The Company also formally assesses both, at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. When it is determined that a derivative is not highly effective as a hedge or has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.
Changes in the fair value of floating-to-fixed interest rate swaps, treasury locks, commodity futures and option contracts or foreign currency forward contracts, swaps and options that are highly effective and that are designated and qualify as cash-flow hedges are recorded in other comprehensive income, net of applicable income taxes. Realized gains and losses associated with changes in the fair value of interest rate swaps and treasury locks are reclassified from accumulated other comprehensive income (“AOCI”) to the Consolidated Statement of Income over the life of the
62
underlying debt. Gains and losses on hedges of foreign currency cash flows associated with certain forecasted commercial transactions or loans are reclassified from AOCI to the Consolidated Statement of Income when such transactions or obligations are settled. Gains and losses on commodity hedging contracts are reclassified from AOCI to the Consolidated Statement of Income when the finished goods produced using the hedged item are sold. The maximum term over which the Company hedges exposures to the variability of cash flows for commodity price risk is generally 24 months. Changes in the fair value of a fixed-to-floating interest rate swap agreement that is highly effective and that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged debt obligation, are recorded in earnings. The ineffective portion of the change in fair value of a derivative instrument that qualifies as either a cash-flow hedge or a fair-value hedge is reported in earnings.
The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows or fair value of the hedged item, the derivative is de-designated as a hedging instrument because it is unlikely that a forecasted transaction will occur, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, the Company continues to carry the derivative on the Consolidated Balance SheetSheets at its fair value, and gains and losses that were included in AOCI are recognized in earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings, or in the month a hedge is determined to be ineffective.
The Company uses derivative financial instruments such as foreign currency forward contracts, swaps and options to manage the transactional foreign exchange risk that is created when transactions not denominated in the functional currency of the operating unit are revalued. The changes in fair value of these derivative instruments and the offsetting changes in the value of the underlying non-functional currency denominated transactions are recorded in earnings on a monthly basis.
Stock-based compensation --Share-based compensation: The Company has a stock incentive plan that provides for stock-basedshare-based employee compensation, including the granting of stock options, shares of restricted stock, restricted stock units, and performance shares to certain key employees. Compensation expense is recognized in the Consolidated Statements of Income for the Company’s stock-basedshare-based employee compensation plan. The plan is more fully described in Note 1211 of the notesNotes to the consolidated financial statements.Consolidated Financial Statements.
Earnings per common share --share: Basic earnings per common share (“EPS”) is computed by dividing net income attributable to Ingredionthe Company by the weighted average number of shares outstanding, which totaled 72.3 million for 2016, 71.6 million for 2015 and 73.6 million for 2014.outstanding. Diluted earnings per share (EPS)EPS is calculated using the treasury stock method, computed by dividing net income attributable to Ingredionthe Company by the weighted average number of shares outstanding, including the dilutive effect of outstanding stock options and other instruments associated with long-term incentive compensation plans. The weighted average number of shares outstanding for diluted EPS calculations was 74.1 million, 73.0 million and 74.9 million for 2016, 2015 and 2014, respectively. In 2016, the number of share-based awards of common stock excluded from the calculation of weighted average number of shares outstanding for the diluted EPS because their effects were not dilutive was not material. In 2015 and 2014, approximately 0.3 million and 0.1 million share-based awards of common stock, respectively, were excluded from the calculation of the weighted average number of shares outstanding for diluted EPS because their effects were anti-dilutive.
Risks and uncertainties --uncertainties: The Company operates domestically and internationally. In each country, the business and assets are subject to varying degrees of risk and uncertainty. The Company insures its business and assets in each country against insurable risks in a manner that it deems appropriate. Because of this geographic dispersion, the Company
63
believes that a loss from non-insurable events in any one country would not have a material adverse effect on the Company’s operations as a whole. Additionally, the Company believes there is no significant concentration of risk with any single customer or supplier whose failure or non-performance would materially affect the Company’s results.
Recently adopted accounting standards -- Adopted Accounting Standards
ASU No. 2016-02, Leases (Topic 842)
In MarchFebruary 2016, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update ("ASU"(“ASU”) No. 2016-09, Compensation – Stock Compensation2016-02, Leases (Topic 718)842), which supersedes Topic 840, Leases. The Company adopted this updated standard as of January 1, 2019, using the modified retrospective approach and the effective date as its date of initial application. The Company elected the package of three practical expedients permitted under the transition guidance, which among other things allowed the Company to carry forward the historical lease classification of existing leases and to not reassess expired contracts for leases. The practical expedient for hindsight to determine lease term was not elected by the Company. The standard resulted in the initial recognition of $170 million of total operating lease liabilities and $161 million of operating lease assets on the Consolidated Balance Sheet on January 1, 2019. The standard did not materially impact the Consolidated Statement of Income or Consolidated Statement of Cash Flows. The disclosures required by the recently adopted accounting standard are included in Note 8 of the Notes to the Consolidated Financial Statements.
ASU No. 2017-12 and ASU 2018-16, Derivatives and Hedging (Topic 815)
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815):Targeted Improvements to Employee Share-Based Payment Accounting, a new standard that changes for Hedging Activities. This Update modifies accounting guidance for hedge accounting by making more hedge strategies eligible for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess ineffectiveness. The intent is to simplify the application of hedge accounting for certain aspectsand increase transparency of share-based payments to employees.information about an entity’s risk management activities. The newamended guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies
63
that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The new standard is effective for usannual periods beginning January 1, 2017,after December 15, 2018, with early adoption permitted.
The Company electedcompleted its assessment of these updates adopted on January 1, 2019, including potential changes to existing hedging arrangements, and determined the adoption of the guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as Benchmark Interest Rate for Hedge Accounting Purposes. This Update permits use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes. The guidance should be adopted on a prospective basis. This Update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Update did not have a material impact on the Company’s Consolidated Financial Statements.
New Accounting Standards
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This Update simplifies the subsequent measurement of goodwill as the Update eliminates Step 2 from the goodwill impairment test. Under the Update, an entity will continue to perform its annual, or interim, goodwill impairment test to determine if the fair value of a reporting unit is greater than its carrying amount. An entity should then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value using the results of its Step 1 assessment, with the loss recognized not to exceed the total amount of goodwill allocated to that reporting unit. This Update is effective for annual periods beginning after December 15, 2019, with early adoption permitted. The Company will adopt ASU 2017-04 at the new guidancebeginning of its 2020 fiscal year and the Update will not have a material impact on the Company’s Consolidated Financial Statements upon adoption.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires us to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. This Update is effective for annual periods beginning after December 15, 2019, with early adoption permitted. The Company will adopt ASU 2016-13 at the beginning of its 2020 fiscal year and the Update will not have a material impact on the Company’s Consolidated Financial Statements upon adoption.
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Presentation of Net Sales
During the three months ended December 31, 2019, the Company changed its presentation of shipping and handling costs. These costs were previously included as a reduction to Net sales in the second quarterConsolidated Statements of fiscal year 2016.Income. The primary impactCompany is now presenting these expenses within Cost of adoption was the recognition of excess tax benefitssales in the Company’s provision for income taxes rather than paid-in capital for all periods in fiscal year 2016.Consolidated Statements of Income. The change in tax withholding guidancepresentation was applied retrospectively to all periods presented in the Consolidated Statements of Income. The change in presentation had no impact to retainedeffect on Gross profit, Operating income, Net income, or earnings asper share. The Consolidated Balance Sheets, Consolidated Statements of January 1, 2016,Comprehensive Income, Consolidated Statements of Equity and therefore no cumulative effect was required to be recorded. The Company has elected to continue to estimate forfeitures expected to occur to determine the amountRedeemable Equity, and Consolidated Statements of compensation cost to be recognizedCash Flows are not affected by this change in each period.
The Company elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively, which resultedpresentation. Total shipping and handling costs in an increase in cash provided by operating activities and a decrease in cash provided by financing activities for the year ended December 31, 2016. No changes in presentation will be made for prior years presented. 2019 were $466 million.
The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to anyeffect of the periods presented in the Company’s consolidated cash flows statements since such cash flows have historically been presented as a financing activity.
Adoption of the new standard resulted in the recognition of excess tax benefits in the Company’s provision for income taxes rather than additional paid-in-capital of $12 million for the year ended December 31, 2016, as well as an increase of 0.4 million diluted weighted average common shares outstanding for this period. The adoption of the new standard impacted the Company’s previously reported results for the first quarter of 2016adjustment is as follows:
| | | | | | | | | | | | | |
| | 2018 | | 2017 | | ||||||||
(in millions) | | As Reported | | As Adjusted | | As Reported | | As Adjusted | | ||||
Consolidated Statements of Income: | | | | | | | | | | | | | |
Net sales before shipping and handling costs | | $ | 6,289 | | $ | — | | $ | 6,244 | | $ | — | |
Less: shipping and handling costs | | | 448 | | | — | | | 412 | | | — | |
Net sales | | | 5,841 | | | 6,289 | | | 5,832 | | | 6,244 | |
Cost of sales | | | 4,473 | | | 4,921 | | | 4,360 | | | 4,772 | |
Gross profit | | $ | 1,368 | | $ | 1,368 | | $ | 1,472 | | $ | 1,472 | |
| | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2019 | | ||||||||||||||||
| | First Fiscal Quarter | | Second Fiscal Quarter | | Third Fiscal Quarter | | ||||||||||||
(in millions) | | As Reported | | As Adjusted |
| As Reported | | As Adjusted |
| As Reported | | As Adjusted | | ||||||
Net sales before shipping and handling costs | | $ | 1,536 | | $ | — | | $ | 1,550 | | $ | — | | $ | 1,574 | | $ | — | |
Less: shipping and handling costs | | | 116 | | | — | | | 116 | | | — | | | 117 | | | — | |
Net sales | | | 1,420 | | | 1,536 | | | 1,434 | | | 1,550 | | | 1,457 | | | 1,574 | |
Cost of sales | | | 1,104 | | | 1,220 | | | 1,105 | | | 1,221 | | | 1,113 | | | 1,230 | |
Gross profit | | $ | 316 | | $ | 316 | | $ | 329 | | $ | 329 | | $ | 344 | | $ | 344 | |
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| | For the Year Ended December 31, 2018 | | ||||||||||||||||||||||
| | First Fiscal Quarter | | Second Fiscal Quarter | | Third Fiscal Quarter | | Fourth Fiscal Quarter | | ||||||||||||||||
(in millions) | | As Reported | | As Adjusted |
| As Reported | | As Adjusted | | As Reported | | As Adjusted | | As Reported | | As Adjusted | | ||||||||
Net sales before shipping and handling costs | | $ | 1,581 | | $ | — | | $ | 1,608 | | $ | — | | $ | 1,563 | | $ | — | | $ | 1,537 | | $ | — | |
Less: shipping and handling costs | | | 112 | | | — | | | 112 | | | — | | | 113 | | | — | | | 111 | | | — | |
Net sales | | | 1,469 | | | 1,581 | | | 1,496 | | | 1,608 | | | 1,450 | | | 1,563 | | | 1,426 | | | 1,537 | |
Cost of sales | | | 1,115 | | | 1,227 | | | 1,136 | | | 1,248 | | | 1,116 | | | 1,229 | | | 1,106 | | | 1,217 | |
Gross profit | | $ | 354 | | $ | 354 | | $ | 360 | | $ | 360 | | $ | 334 | | $ | 334 | | $ | 320 | | $ | 320 | |
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(in millions, except share and per share amounts) |
| Three Months Ended March 31, 2016 |
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Consolidated Statement of Income: |
| As reported |
| As adjusted |
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Provision for income taxes |
| $ | 56 |
| $ | 53 |
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Net income |
| $ | 130 |
| $ | 133 |
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Net income attributable to Ingredion |
| $ | 127 |
| $ | 130 |
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Basic earnings per common share of Ingredion |
| $ | 1.77 |
| $ | 1.81 |
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Diluted earnings per common share of Ingredion |
| $ | 1.73 |
| $ | 1.77 |
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Diluted weighted average common shares outstanding |
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| 73.3 |
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| 73.6 |
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Consolidated Statement of Cash Flows: |
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Cash provided by operating activities |
| $ | 96 |
| $ | 99 |
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Cash provided by financing activities |
| $ | 9 |
| $ | 6 |
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Consolidated Balance Sheet: |
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Additional paid-in capital |
| $ | 1,154 |
| $ | 1,151 |
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Retained earnings |
| $ | 2,647 |
| $ | 2,650 |
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| | | | | | | | | | | | | |
| | 2018 | | 2017 | | ||||||||
(in millions) | | As Reported | | As Adjusted | | As Reported | | As Adjusted | | ||||
Net sales to unaffiliated customers: | | | | | | | | | | | | | |
North America | | $ | 3,511 | | $ | 3,857 | | $ | 3,529 | | $ | 3,843 | |
South America | | | 943 | | | 988 | | | 1,007 | | | 1,052 | |
Asia-Pacific | | | 803 | | | 837 | | | 740 | | | 772 | |
EMEA | | | 584 | | | 607 | | | 556 | | | 577 | |
Total | | $ | 5,841 | | $ | 6,289 | | $ | 5,832 | | $ | 6,244 | |
NOTE 3 – Acquisitions
On August 3, 2015,March 1, 2019, the Company completed its acquisition of Kerr Concentrates, Inc.Western Polymer LLC (“Kerr”Western Polymer”), a privately held producer of natural fruit and vegetable concentrates for $102 million in cash. Kerr serves major food and beverage companies, flavor houses and ingredient producers from its manufacturing locations in Oregon and California. The acquisition of Kerr provided the Company with the opportunity to expand its product portfolio. The Company finalized the purchase price allocation during the first quarter of 2016, which did not have a significant impact on previously estimated amounts.
On December 29, 2016, the Company completed its acquisition of TIC Gums Incorporated (“TIC Gums”), a privately held,privately-held, U.S.-based company headquartered in Moses Lake, Washington, that provides advanced texture systems to theproduces native and modified potato starches for industrial and food and beverage industryapplications for $395$42 million, net of cash acquired. acquired of $4 million. The acquisition will expand the Company's potato starch manufacturing capacity, enhance processing capabilities, and broaden its higher-value specialty ingredients business and customer base. The results of the acquired operation are included in the Company’s consolidated results from the acquisition date forward within the North America business segment.
A preliminary allocation of the purchase price to the assets acquired and liabilities assumed was made based on available information and incorporating management’s best estimates. The assets acquired and liabilities assumed in the transactionstransaction are generally recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition wereare expensed as incurred. AllAs of the recordedDecember 31, 2019, $13 million of goodwill and intangible assets, and liabilities, including working capital, PP&E, goodwill and intangibles, are open to change as the Company is still in process$29 million of performing purchase accounting. The
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Company funded the acquisition with proceeds from borrowings under its revolving credit agreement. The results of the acquired operations will be included in the Company’s consolidated results from the respective acquisition dates forward within the North America and Asia Pacific business segments.
net tangible assets have preliminarily been recorded. Goodwill represents the amount by which the purchase price exceeds the estimated fair value of the net assets acquired. Goodwill and intangible assets are open to be finalized as of December 31, 2019 pending finalization of tax matters. The goodwill of $186 million and $27 million for TIC Gums and Kerr, respectively, resultresults from synergies and other operational benefits expected to be derived from the acquisitions.acquisition. The goodwill related to each acquisitionWestern Polymer is tax deductibletax-deductible due to the structure of the acquisitions.acquisition.
The following table summarizes the finalized purchase price allocation for the acquisition of Kerr and preliminary purchase price allocation for the acquisition of TIC Gums as of August 3, 2015 and December 29, 2016, respectively:
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| Final |
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| Preliminary |
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(in millions) |
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| Kerr |
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| TIC Gums |
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Working capital (excluding cash) |
| $ | 37 |
| $ | 50 |
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Property, plant and equipment |
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| 8 |
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| 42 |
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Other assets |
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| 1 |
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| — |
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Identifiable intangible assets |
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| 29 |
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| 117 |
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Goodwill |
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| 27 |
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| 186 |
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Total purchase price |
| $ | 102 |
| $ | 395 |
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The identifiable intangible assets for the acquisition of Kerr included items such as customer relationships, proprietary technology, trade names, and noncompetition agreements. The fair values of these intangible assets were determined to be Level 3 under the fair value hierarchy. Level 3 inputs are unobservable inputs for an asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for fair value estimates to be made in situations in which there is little, if any, market activity for an asset or liability at the measurement date. The following table presents the fair values, valuation techniques, and estimated remaining useful life at the acquisition date for these Level 3 measurements (dollars in millions):
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The fair value of customer relationships, trade names and noncompetition agreements were determined through the valuation techniques described above using various judgmental assumptions such as discount rates, royalty rates, and customer attrition rates, as applicable. The fair values of property, plant and equipment associated with the acquisitions were determined to be Level 3 under the fair value hierarchy. Property, plant and equipment values were estimated using either the cost or market approach.
On November 29, 2016, the Company completed its acquisition of Shandong Huanong Specialty Corn Development Co., Ltd. (“Shandong Huanong”) in China for $12 million in cash. The acquisition of Shandong Huanong, located in Shandong Province, adds a second manufacturing facility to our operations in China. It produces starch raw material for our plant in Shanghai, which makes value-added ingredients for the food industry. The acquisition added $7 million to intangible assets, with $5 million allocated to net tangible assets. The purchase accounting is still open to finalize the valuation of the intangibles.
Pro-forma results of operations for the acquisitionsacquisition made in 2016the year ended December 31, 2019 have not been presented as the effect of eachthe acquisition individually and in aggregate would not be material to the Company’s results of operations for any periods presented.
The Company incurred $3 million, $ — , and $4 million of pre-tax acquisition and integration costs for 2016in the years ended December 31, 2019, 2018, and 2017, respectively, associated with its recent acquisitions. In 2015, the Company incurred $10 million of pre-tax acquisition and integration costs associated with the 2015 acquisitions.
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NOTE 4 – SaleRevenue Recognition
The Company applies the provisions of Canadian Plant
On December 15, 2015,ASC 606-10, Revenue from Contracts with Customers. The Company recognizes revenue under the core principle to depict the transfer of products to customers in an amount reflecting the consideration the Company sold its manufacturing assetsexpects to receive. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in Port Colborne, Ontario, Canada for $35 millionthe contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in cash. the contract, and (5) recognize revenue when a performance obligation is satisfied.
The Company recordedidentified customer purchase orders, which in some cases are governed by a pre-tax gainmaster sales agreement, as the contracts with its customers. For each contract, the Company considers the transfer of $10 millionproducts, each of which is distinct, to be the identified performance obligation. In determining the transaction price for the performance obligation, the Company evaluates whether the price is subject to adjustment to determine the consideration to which the Company expects to be entitled. The pricing model can be fixed or variable within the contract. The variable pricing model is based on historical commodity pricing and is determinable prior to completion of the sale,performance obligation. Additionally, the Company has certain sales adjustments for volume incentive discounts and other discount arrangements that reduce the transaction price. The reduction of transaction price is estimated using the expected value method based on an analysis of historical volume incentives or discounts, over a period of time considered adequate to account for current pricing and business trends. Historically, actual volume incentives and discounts relative to those estimated and included when determining the transaction price have not materially differed. Volume incentives and discounts are accrued at the
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satisfaction of the performance obligation and accounted for in Accounts payable and Accrued liabilities in the Consolidated Balance Sheets. These amounts are not significant as of December 31, 2019, and 2018. The product price as specified in the contract, net of any discounts, is considered the write-offstandalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Payment is received shortly after the performance obligation is satisfied; therefore, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component.
Revenue is recognized when the Company’s performance obligation is satisfied and control is transferred to the customer, which occurs at a point in time, either upon delivery to an agreed upon location or to the customer. Further, in determining whether control has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of goodwillownership having transferred to the customer.
Shipping and handling activities related to contracts with customers represent fulfillment costs and are recorded in Cost of $2 million associated with the business.sales. Taxes assessed by governmental authorities and collected from customers are accounted for on a net basis and excluded from net sales. The Company also recorded pre-tax restructuring chargesapplies a practical expedient to expense costs to obtain a contract as incurred as most contracts are one year or less. These costs primarily include the Company’s internal sales force compensation. Under the terms of $4 millionthese programs, these are generally earned and the costs are recognized at the time the revenue is recognized.
From time to time the Company may enter into long-term contracts with its customers. Historically, the contracts entered into by the Company do not result in 2015 associated withsignificant contract assets or liabilities. Any such arrangements are accounted for in Other assets or Accrued liabilities in the Consolidated Balance Sheets. There were no significant contract assets or liabilities as of December 31, 2019, and 2018.
The Company is principally engaged in the production and sale of starches and sweeteners for a wide range of industries, and is managed geographically on a regional basis. The Company’s operations are classified into 4 reportable business segments: North America, South America, Asia-Pacific and Europe, Middle East and Africa (“EMEA”). The nature, amount, timing and uncertainty of the plant as described below. Additionally, in 2016Company’s Net sales are managed by the Company recorded pre-tax restructuring charges of $2 million relatedprimarily based on its geographic segments. Each region’s product sales are unique to the Port Colborne plant sale. each region and have unique risks.
| | | | | | | | | | |
(in millions) |
| 2019 |
| 2018 |
| 2017 | | |||
Net sales to unaffiliated customers: | | | | | | | | | | |
North America | | $ | 3,834 | | $ | 3,857 | | $ | 3,843 | |
South America | | | 960 | | | 988 | | | 1,052 | |
Asia-Pacific | | | 823 | | | 837 | | | 772 | |
EMEA | | | 592 | | | 607 | | | 577 | |
Total | | $ | 6,209 | | $ | 6,289 | | $ | 6,244 | |
NOTE 5 – Restructuring and Impairment Charges
In 2016,the year ended December 31, 2019, the Company recorded $19$57 million of pre-tax restructuring charges. Pre-tax restructuring charges of $28 million were recorded for the year ended December 31, 2019 for the Cost Smart SG&A program. These costs include $15 million, of other costs, including professional services, and $13 million of employee-related severance for the year ended December 31, 2019. These charges were recorded primarily in the Company’s North America and South America operations, and include $2 million of other costs associated with the Finance Transformation initiative in Latin America for the year ended December 31, 2019. The Company expects to continue to incur additional charges in 2020 related to the Cost Smart SG&A program.
Additionally, for the year ended December 31, 2019, the Company recorded $29 million for its Cost Smart Cost of sales program. During the year ended December 31, 2019, the Company recorded $15 million of restructuring charges in relation to the closure of the Lane Cove, Australia production facility, consisting of $10 million of accelerated depreciation, $4 million of employee-related severance, and $1 million of other costs. The Company expects to incur additional expense of $10 million to $12 million in 2020 in relation to the closure, excluding potential proceeds from the sale of land and equipment. Additionally, during the year ended December 31, 2019, the Company recorded $3 million of employee-related expenses primarily related to South America operations restructuring. The Company also recorded $11 million of other costs, including professional services, during the year ended December 31, 2019, primarily in North America including other costs of $2 million in relation to the prior year cessation of wet-milling at the Stockton, California
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plant. The Company does not expect to incur any additional costs in relation to the cessation of wet-milling at the Stockton, California plant.
In the year ended December 31, 2018, the Company recorded $64 million of pre-tax restructuring charges. During the second quarter of 2018, the Company introduced its Cost Smart program, designed to improve profitability, further streamline its global business and deliver increased value to shareholders through anticipated savings in cost of sales, including freight, and SG&A. For the year ended December 31, 2018, the Company recorded $49 million of restructuring expenses as part of the Cost Smart Cost of sales program in relation to the cessation of wet-milling at the Stockton, California plant, consisting of $34 million of accelerated depreciation, $8 million of mechanical stores, $3 million of employee-related severance and $4 million of other costs.
As part of its Cost Smart SG&A program, during the third quarter of 2018, the Company announced a Finance Transformation initiative in Latin America to strengthen organizational capabilities and drive efficiencies to support the growth strategy of the Company. The Company recorded $4 million of employee-related severance and other costs duefor the year ended December 31, 2018, in relation to the executionthis initiative. In addition, restructuring expenses of global information technology (“IT”) outsourcing contracts, $6$7 million ($6 million employee-related severance and $1 million of employee-related severanceconsulting costs) were recorded as part of the Cost Smart SG&A program for the year ended December 31, 2018 in the South America, Asia-Pacific, and North America segments.
Additionally, for the year ended December 31, 2018, the Company recorded $3 million of other restructuring costs associated with the Company’s optimization initiatives in North America and South America, and $2 million of costs attributable to the 2015 Port Colborne plant sale. The Company expects to incur approximatelyFinance Transformation initiative as well as $1 million of other restructuring costs associated withrelated to the IT outsourcing project in 2017.
On September 8, 2015, the Company announced that it planned to consolidate its manufacturing networkleaf extraction process in Brazil. Production at plants in Trombudo Central and Conchal has ceased and has been moved to plants in Balsa Nova and Mogi Guaçu, respectively. The Company recorded total pre-tax restructuring-related charges of $12 million related to these plant closures in 2015, consisting of a $10 million charge for impaired assets and $2 million of employee severance-related costs.
The Company also recorded pre-tax restructuring charges of $4 million in 2015, of which $2 million was for estimated employee severance-related costs, associated with the Port Colborne plant sale.
Additionally in 2015, the Company recorded a pre-tax restructuring charge of $12 million for employee severance-related costs associated with the Penford acquisition.
A summary of the Company’s severance accrual at December 31, 20162019, is as follows (in millions):
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Balance in severance accrual as of December 31, 2018 |
| $ | 10 | |
Cost Smart Cost of sales and SG&A | | | 20 | |
Payments made to terminated employees | | | (16) | |
Foreign exchange translation | | | 1 | |
Balance in severance accrual as of December 31, 2019 |
| $ | 15 | |
TheOf the $15 million severance accrual at December 31, 20162019, $14 million is expected to be paid within the next twelve12 months.
The Company assesses goodwill and other indefinite-lived intangible assets for impairment annually, (oror more frequently if impairment indicators arise) as of October 1 of each year. Noarise. NaN goodwill or indefinite-lived intangible asset impairment was recognized in either the fourth quarter of 2016years ended December 31, 2019, 2018, or 20152017 related to the Company’s annual impairment testing. The results of the Company’s impairment testing in the fourth quarter of 2014 indicated that the estimated fair value of the Company’s Southern Cone of South America reporting unit was less than its carrying amount. Therefore, the Company recorded a non-cash impairment charge of $33 million in the fourth quarter of 2014 to write-off the remaining balance of goodwill for this reporting unit.
NOTE 6 – Financial Instruments, Derivatives and Hedging Activities
The Company is exposed to market risk stemming from changes in commodity prices (corn(primarily corn and natural gas), foreign currency exchange rates and interest rates. In the normal course of business, the Company actively manages its exposure to these market risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities. These transactions utilize exchange-traded derivatives or over-the-counter derivatives with investment-gradeinvestment grade counterparties. Derivative financial instruments currently used by the Company consist of commoditycommodity-related futures, options, and swap contracts, foreign currencycurrency-related forward contracts, swaps and options, and interest rate swaps.
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Commodity price hedging: hedging: The Company’s principal use of derivative financial instruments is to manage commodity price risk in North America relating to anticipated purchases of corn and natural gas to be used in the manufacturing process, generally over the next twelve12 to twenty-four24 months. The Company maintains a commodity-price risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity-price volatility. For example, the manufacturing of the Company’s products requires a significant volume of corn and natural gas. Price fluctuations in corn and natural gas cause the actual purchase price of corn and natural gas to differ from anticipated prices.
To manage price risk related to corn purchases primarily in North America, the Company uses corn futures and optionsoption contracts that trade on regulated commodity exchanges to lock in itslock-in corn costs associated with firm-pricedfixed-priced customer sales contracts. The Company also uses over-the-counter natural gas swaps in North America to hedge a portion of its natural gas usage in North America.usage. These derivative financial instruments limit the impact that volatility resulting from fluctuations in market prices will have on corn and natural gas purchasespurchases. The Company’s natural gas derivatives and the majority of its corn derivatives have been designated as cash-flow hedges. Effective with the acquisitioncash flow hedging instruments.
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The Company now enters into futures contracts to hedgecertain corn derivative instruments that are not designated as hedging instruments as defined by ASC 815, Derivatives and Hedging. Therefore, the realized and unrealized gains and losses from these instruments are recognized in cost of sales during each accounting period. These derivative instruments also mitigate commodity price risk associated with fluctuations in market pricesrelated to anticipated purchases of ethanol. Unrealizedcorn.
For commodity hedges designated as cash flow hedges, unrealized gains and losses associated with marking the commodity hedging contracts to market (fair value) are recorded as a component of other comprehensive income (“OCI”) and included in the equity section of the Consolidated Balance Sheets as part of AOCI. These amounts are subsequently reclassified into earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings, or in the month a hedge is determined to be ineffective. The Company assesses the effectiveness of a commodity hedge contract based on changes in the contract’s fair value. The changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in the price of the hedged items. The amounts representingGains and losses from cash flow hedging instruments reclassified from AOCI to earnings are reported as Cash provided by operating activities on the ineffectivenessConsolidated Statements of these cash-flow hedges are not significant.Cash Flows.
AtAs of December 31, 2016,2019, the amount includedCompany had outstanding futures and option contracts that hedged the forecasted purchase of approximately 98 million bushels of corn. The Company had outstanding swap and option contracts that hedged the forecasted purchase of approximately 30 million mmbtu’s of natural gas at December 31, 2019.
Foreign currency hedging: Due to the its global operations, including operations in AOCI relatingmany emerging markets, the Company is exposed to these commodities-relatedfluctuations in foreign currency exchange rates. As a result, the Company has exposure to translational foreign-exchange risk when the results of its foreign operations are translated to U.S. dollars and to transactional foreign-exchange risk when transactions not denominated in the functional currency are revalued. The Company’s foreign-exchange risk management strategy uses derivative financial instruments such as foreign currency forward contracts, swaps and options to manage its transactional foreign exchange risk. The Company enters into foreign currency derivative instruments that are designated as cash-flow hedges wasboth cash flow hedging instruments as well as instruments not significant. Atdesignated as hedging instruments as defined by ASC 815, Derivatives and Hedging, in order to mitigate transactional foreign-exchange risk. Gains and losses from derivative financial instruments not designated as hedging instruments are marked to market in earnings during each accounting period.
The notional value of the Company’s foreign currency derivatives not designated as hedging instruments included forward sales contracts of $621 million as of both December 31, 2015, AOCI included $21 million2019 and 2018. The notional value of losses (net of tax of $10 million), pertaining to commodities-related derivative instrumentsthe Company’s foreign currency derivatives not designated as cash-flow hedges.hedging instruments also included purchase contracts with notional value of $356 million and $165 million as of December 31, 2019 and 2018, respectively.
The notional value of the Company’s foreign currency cash flow hedging instruments included forward sales contracts of $374 million and $345 million as well as forward purchase contracts of $541 million and $275 million as of December 31, 2019, and 2018, respectively.
Interest rate hedging: The Company assesses its exposure to variability in interest rates by identifying and monitoring changes in interest rates that may adversely impact future cash flows and the fair value of existing debt instruments, and by evaluating hedging opportunities. The Company maintainsCompany’s risk management control systemsstrategy is to monitor interest rate risk attributable to both the Company’s outstanding and forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including sensitivity analysis, to estimate the expected impact of changes in interest rates on future cash flows and the fair value of the Company’s outstanding and forecasted debt instruments.
Derivative financial instruments that have been used by the Company to manage its interest rate risk consist of Treasury Lock agreements (“T-Locks”) and interest rate swaps. swaps and T-Locks.
The Company has an interest rate swap agreement that converts the interest rates on $200 million of its $400 million of 4.625% senior notes due November 1, 2020, to variable rates. This swap agreement calls for the Company to receive interest at the fixed coupon rate of the respective notes and to pay interest at a variable rate based on the six-month U.S. dollar London Interbank Offered Rate (“LIBOR”) plus a spread. The Company has designated this interest rate swap agreement as a hedge of the changes in fair value of the underlying debt obligations attributable to changes in interest rates and accounts for it as a fair value hedging instrument. The change in fair value of an interest rate swap designated as a hedging instrument that effectively offsets the variability in the fair value of outstanding debt obligations is reported in earnings. This amount offsets the gain or loss (the change in fair value) of the hedged debt instrument that is attributable to changes in interest rates (the hedged risk), which is also recognized in earnings.
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The Company periodically enters into T-Locks to fix the benchmark component of thehedge its exposure to interest rate to be established for certain planned fixed-rate debt issuances.changes. The T-Locks are designated as hedges of the variability in cash flows associated with future interest payments caused by market fluctuations in the benchmark interest rate until the fixed interest rate is established, and are accounted for as cash-flowcash flow hedges. Accordingly, changes in the fair value of the T-Locks are recorded to AOCI until the consummation of the underlying debt offering, at which time any realized gain (loss) is amortized to earnings over the life of the debt. The net gain or loss recognized in earnings during 2016, 2015 and 2014 was not significant. The Company also, from time to time, enters into interest rate swap agreements that effectively convert the interest rate on certain fixed-rate debt to a variable rate. These swaps call for the Company to receive interest at a fixed rate and to pay interest at a variable rate, thereby creating the equivalent of variable-rate debt. The Company designates these interest rate swap agreements as hedges of the changes in fair value of the underlying debt obligation attributable to changes in interest rates and accounts for them as fair-value hedges. Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability in the fair value of outstanding debt obligations are reported in earnings. These amounts offset the gain or loss (that is, the change in fair value) of the hedged debt instrument that is attributable to changes in interest rates (that is, the hedged risk) which is also recognized in earnings. The Company did not have any T-Locks outstanding atas of December 31, 20162019, or 2015. At December 31, 2016 and 2015, AOCI included $4 million of losses (net of income taxes of $2 million) and $5 million of losses (net of income taxes of $2 million), respectively, related to settled T-Locks. These deferred losses are being amortized to financing costs over the terms of the senior notes with which they are associated.2018.
67
In September 2014, the Company entered into interest rate swap agreements that effectively convert the interest rates on its 6.0 percent $200 million senior notes due April 15, 2017, its 1.8 percent $300 million senior notes due September 25, 2017 and on $200 million of its $400 million 4.625 percent senior notes due November 1, 2020, to variable rates. These swap agreements call for the Company to receive interest at the fixed coupon rate of the respective notes and to pay interest at a variable rate based on the six-month US dollar LIBOR rate plus a spread. The Company has designated these interest rate swap agreements as hedges of the changes in fair value of the underlying debt obligations attributable to changes in interest rates and accounts for them as fair-value hedges. The fair value of these interest rate swap agreements was $3 million and $7 million at December 31, 2016 and 2015, respectively, and is reflected in the Consolidated Balance Sheets within Other assets, with an offsetting amount recorded in Long-term debt to adjust the carrying amount of the hedged debt obligations.
Foreign currency hedging: Due to the Company’s global operations, including many emerging markets, it is exposed to fluctuations in foreign currency exchange rates. As a result, the Company has exposure to translational foreign exchange risk when the results of its foreign operations are translated to US dollars and to transactional foreign exchange risk when transactions not denominated in the functional currency are revalued. The Company primarily uses derivative financial instruments such as foreign currency forward contracts, swaps and options to manage its transactional foreign exchange risk. At December 31, 2016, the Company had foreign currency forward sales contracts with an aggregate notional amount of $432 million and foreign currency forward purchase contracts with an aggregate notional amount of $227 million that hedged transactional exposures. At December 31, 2015, the Company had foreign currency forward sales contracts with an aggregate notional amount of $606 million and foreign currency forward purchase contracts with an aggregate notional amount of $287 million that hedged transactional exposures. The fair values of these derivative instruments were assets of $5 million and $10 million at December 31, 2016 and 2015, respectively.
The Company also has foreign currency derivative instruments that hedge certain foreign currency transactional exposures and are designated as cash-flow hedges. The amountscash flow hedges included in AOCI relating to these hedges at bothas of December 31, 20162019 and 2015 were not significant.2018 are reflected below:
| | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Amount of Gains | | ||||
(in millions) | | 2019 | | 2018 | | ||
Commodity contracts, net of income tax effect of $5 and $2, respectively | | $ | (11) | | $ | (2) | |
Foreign currency contracts, net of income tax effect of $1 and $ — , respectively | | | 3 | | | — | |
Interest rate contracts, net of income tax effect of $ — and $1, respectively | | | (1) | | | (2) | |
Total | | $ | (9) | | $ | (4) | |
By using derivative financial instruments to hedge exposures, the Company exposes itself to credit risk and market risk. Credit risk is the risk that the counterparty will fail to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The Company minimizes the credit risk in derivative instruments by entering into over-the-counter transactions only with investment grade counterparties or by utilizing exchange-traded derivatives. Market risk is the adverse effect on the value of a financial instrument that results from a change in commodity prices, interest rates or foreign exchange rates. The market risk associated with commodity-price, interest rate or foreign exchange contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
The fair value and balance sheet location of the Company’s derivative instruments, presented gross in the Condensed Consolidated Balance sheets,Sheets, are reflected below:
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|
| Fair Value of Derivative Instruments |
| ||||||||||||||
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| Fair Value |
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|
| Fair Value |
| ||||||||
Derivatives designated as |
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|
| At |
| At |
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|
| At |
| At |
| ||||
hedging instruments: |
| Balance Sheet |
| December 31, |
| December 31, |
| Balance Sheet |
| December 31, |
| December 31, |
| ||||
(in millions) |
| Location |
| 2016 |
| 2015 |
| Location |
| 2016 |
| 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity and foreign currency |
| Accounts receivable-net |
| $ | 31 |
| $ | 18 |
| Accounts payable and accrued liabilities |
| $ | 25 |
| $ | 38 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity, foreign currency, and interest rate contracts |
| Other assets |
|
| 8 |
|
| 14 |
| Non-current liabilities |
|
| 2 |
|
| 4 |
|
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|
|
|
|
|
|
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|
|
|
|
|
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|
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Total |
|
|
| $ | 39 |
| $ | 32 |
|
|
| $ | 27 |
| $ | 42 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value of Hedging Instruments as of December 31, 2019 | | ||||||||||||||||||||||
| | Designated Hedging Instruments (in millions) | | Non-Designated Hedging Instruments (in millions) | | ||||||||||||||||||||
Balance Sheet Location | | | Commodity Contracts | | | Foreign Currency Contracts | | | Interest Rate Contracts | | Total | | | Commodity Contracts | | | Foreign Currency Contracts | | | Interest Rate Contracts | | Total | | ||
Accounts receivable, net | | $ | 5 | | $ | 7 | | $ | — | | $ | 12 | | $ | 2 | | $ | 4 | | $ | — | | $ | 6 | |
Other assets | | | 1 | | | 3 | | | 1 | | | 5 | | | — | | | 1 | | | — | | | 1 | |
Assets | | | 6 | | | 10 | | | 1 | | | 17 | | | 2 | | | 5 | | | — | | | 7 | |
Accounts payable and accrued liabilities | | | 13 | | | 4 | | | — | | | 17 | | | 1 | | | 8 | | | — | | | 9 | |
Non-current liabilities | | | 4 | | | 4 | | | — | | | 8 | | | — | | | 2 | | | — | | | 2 | |
Liabilities | | | 17 | | | 8 | | | — | | | 25 | | | 1 | | | 10 | | | — | | | 11 | |
Net (Liabilities)/Assets | | $ | (11) | | $ | 2 | | $ | 1 | | $ | (8) | | $ | 1 | | $ | (5) | | $ | — | | $ | (4) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value of Hedging Instruments as of December 31, 2018 | | ||||||||||||||||||||||
| | Designated Hedging Instruments (in millions) | | Non-Designated Hedging Instruments (in millions) | | ||||||||||||||||||||
Balance Sheet Location | | | Commodity Contracts | | | Foreign Currency Contracts | | | Interest Rate Contracts | | Total | | | Commodity Contracts | | | Foreign Currency Contracts | | | Interest Rate Contracts | | Total | | ||
Accounts receivable, net | | $ | 5 | | $ | 1 | | $ | — | | $ | 6 | | $ | — | | $ | 16 | | $ | — | | $ | 16 | |
Other assets | | | 1 | | | — | | | — | | | 1 | | | — | | | 1 | | | — | | | 1 | |
Assets | | | 6 | | | 1 | | | — | | | 7 |
| | — | | | 17 | | | — | | | 17 | |
Accounts payable and accrued liabilities | | | 6 | | | — | | | — | | | 6 | | | 3 | | | 9 | | | — | | | 12 | |
Non-current liabilities | | | 3 | | | — | | | 1 | | | 4 | | | — | | | 4 | | | — | | | 4 | |
Liabilities | | | 9 | | | — | | | 1 | | | 10 | | | 3 | | | 13 | | | — | | | 16 | |
Net (Liabilities)/Assets | | $ | (3) | | $ | 1 | | $ | (1) | | $ | (3) | | $ | (3) | | $ | 4 | | $ | — | | $ | 1 | |
At December 31, 2016, the Company had outstanding futures and option contracts that hedged the forecasted purchase of approximately 122 million bushels of corn and 41 million pounds of soybean oil. The Company is unable to directly hedge price risk related to co-product sales; however, it occasionally enters into hedges of soybean oil (a competing product to corn oil) in order to mitigate the price risk of corn oil sales. The Company also had outstanding swap and option contracts that hedged the forecasted purchase of approximately 20 million mmbtu’s of natural gas at December 31, 2016.
68
70
Additionally at December 31, 2016,Additional information pertaining to the Company had outstanding ethanol futures contracts that hedged the forecasted sale of approximately 10 million gallons of ethanol.Company’s fair value hedges is presented below:
| | | | | | | | | | | | | |
Line item in the statement of financial position in which the hedged item is included (in millions) | | Carrying Amount of the Hedged Assets/(Liabilities) | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Assets/(Liabilities) | | ||||||||
Balance sheet date as of | | December 31, 2019 | | December 31, 2018 | | December 31, 2019 | | December 31, 2018 | | ||||
Interest Rate Contracts: | | | | | | | | | | | | | |
Long-Term Debt | | $ | (201) | | $ | (199) | | $ | (1) | | $ | 1 | |
Additional information relating to the Company’s derivative instruments is presented below (in millions, pre-tax):below:
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Derivatives in |
| Amount of Losses |
| Location of Losses |
| Amount of Losses |
| ||||||||||||||
Cash-Flow |
| Recognized in OCI |
| Reclassified from |
| Reclassified from AOCI into Income |
| ||||||||||||||
Hedging |
| Year Ended |
| Year Ended |
| Year Ended |
| AOCI |
| Year Ended |
| Year Ended |
| Year Ended |
| ||||||
Relationships |
| December 31, 2016 |
| December 31, 2015 |
| December 31, 2014 |
| into Income |
| December 31, 2016 |
| December 31, 2015 |
| December 31, 2014 |
| ||||||
Commodity and foreign currency contracts |
| $ | (17) |
| $ | (61) |
| $ | (41) |
| Gross profit |
| $ | (47) |
| $ | (43) |
| $ | (70) |
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Interest rate contracts |
|
|
|
|
| — |
|
| — |
| Financing costs, net |
|
| (2) |
|
| (3) |
|
| (3) |
|
Total |
| $ | (17) |
| $ | (61) |
| $ | (41) |
|
|
| $ | (49) |
| $ | (46) |
| $ | (73) |
|
| | | | | | | | | | | | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Gains (Losses) Recognized in OCI on Derivatives | | Income Statement | | Gains (Losses) | | ||||||||||||||
(in millions) | | 2019 | | 2018 | | 2017 | | Location | | 2019 | | 2018 | | 2017 | | ||||||
Commodity contracts | | $ | (24) | | $ | 8 | | $ | (22) | | Cost of sales | | $ | (12) | | $ | (6) | | $ | (5) | |
Foreign currency contracts | | | 5 | | | — | | | 6 | | Net sales/cost of sales | | | — | | | 1 | | | 1 | |
Interest rate contracts | | | — | | | — | | | — | | Financing costs, net | | | (2) | | | (1) | | | (2) | |
Total | | $ | (19) | | $ | 8 | | $ | (16) | | | | $ | (14) | | $ | (6) | | $ | (6) | |
| | | | | | | | | | | | | | | | | | | | | |
Derivatives in Fair Value Hedging Relationships | Income Statement Location of Derivatives Designated as | Gains (Losses) Recognized in Income | | Income Statement Location | | Gains (Losses) Recognized in Income | | ||||||||||||||
(in millions) | Hedging Instruments | 2019 | | 2018 | | 2017 | | of Hedged Items | | 2019 | | 2018 | | 2017 | | ||||||
Interest rate contracts | Financing costs, net | $ | 2 | | $ | (2) | | $ | (2) | | Financing costs, net | | $ | (2) | | $ | 2 | | $ | 2 | |
AtAs of December 31, 2016,2019, AOCI included approximately $1$7 million of net losses (net of tax),income taxes of $2 million) on T-Locks, foreign currency hedges, and commodities-related derivative instruments designated as cash-flowcash flow hedges that are expected to be reclassified into earnings during the next twelve12 months. Transactions and events expected to occur over the next twelve months that will necessitate reclassifying these derivative losses to earnings include the sale of finished goods inventory that includes previously hedged purchases of corn, natural gas and ethanol. The Company expects the losses to be offset by changes in the underlying commodities cost. Additionally at December 31, 2016, AOCI included $1 million of losses (net of tax) on settled T-Locks and $1 million of losses (net of tax) related to foreign currency hedges, which are expected to be reclassified into earnings during the next twelve months. Cash-flowCash flow hedges discontinued during 2016the years ended December 31, 2019 or 20152018 were not significant.
Fair Value Measurements: Presented below are the fair values of the Company’s financial instruments and derivatives for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 | | As of December 31, 2018 | | ||||||||||||||||||||
(in millions) |
| Total |
| Level 1 (a) |
| Level 2 (b) |
| Level 3 (c) |
| Total |
| Level 1 (a) |
| Level 2 (b) |
| Level 3 (c) |
| ||||||||
Available for sale securities | | $ | 13 | | $ | 13 | | $ | — | | $ | — | | $ | 11 | | $ | 11 | | $ | — | | $ | — | |
Derivative assets | | | 24 | | | 7 | | | 17 | | | — | | | 24 | | | 4 | | | 20 | | | — | |
Derivative liabilities | | | 36 | | | 5 | | | 31 | | | — | | | 26 | | | 6 | | | 20 | | | — | |
Long-term debt | | | 1,751 | | | — | | | 1,751 | | | — | | | 1,954 | | | — | | | 1,954 | | | — | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2016 |
| As of December 31, 2015 |
| ||||||||||||||||||||
(in millions) |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||||||
Available for sale securities |
| $ | 7 |
| $ | 7 |
| $ | — |
| $ | — |
| $ | 6 |
| $ | 6 |
| $ | — |
| $ | — |
|
Derivative assets |
|
| 39 |
|
| 6 |
|
| 33 |
|
| — |
|
| 32 |
|
| 2 |
|
| 30 |
|
| — |
|
Derivative liabilities |
|
| 27 |
|
| 11 |
|
| 16 |
|
| — |
|
| 42 |
|
| 21 |
|
| 21 |
|
| — |
|
Long-term debt |
|
| 1,929 |
|
| — |
|
| 1,929 |
|
| — |
|
| 1,912 |
|
| — |
|
| 1,912 |
|
| — |
|
| (a) | Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| (b) | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly for substantially the full term of the financial instrument. Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability or can be derived principally from or corroborated by observable market data. |
| (c) | Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly for substantially the full term of the financial instrument. Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability or can be derived principally from or corroborated by observable market data. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for fair value estimates to be made in situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The carrying values of cash equivalents, short-term investments, accounts receivable, accounts payable, and short-term borrowings approximate fair values. Commodity futures, options, and swap contracts are recognized at fair value. Foreign currency forward contracts, swaps, and options are also recognized at fair value. The fair value of the Company’s long-termLong-term debt is estimated based on quotations of major securities dealers who are market makers in the securities. Presented below are the carrying amounts and the fair values of the Company’s long-term debt at December 31, 2016 and 2015.
|
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|
|
|
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|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
(in millions) |
| amount |
| value |
| amount |
| value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2% senior notes due October 1, 2026 |
| $ | 496 |
| $ | 482 |
| $ | — |
| $ | — |
|
4.625% senior notes due November 1, 2020 |
|
| 398 |
|
| 428 |
|
| 398 |
|
| 420 |
|
1.8% senior notes due September 25, 2017 |
|
| 299 |
|
| 301 |
|
| 299 |
|
| 300 |
|
6.625% senior notes due April 15, 2037 |
|
| 254 |
|
| 299 |
|
| 254 |
|
| 302 |
|
6.0% senior notes due April 15, 2017 |
|
| 200 |
|
| 202 |
|
| 200 |
|
| 211 |
|
5.62% senior notes due March 25, 2020 |
|
| 200 |
|
| 217 |
|
| 200 |
|
| 218 |
|
U.S. revolving credit facility replaced October 2016 |
|
| — |
|
| — |
|
| 111 |
|
| 111 |
|
Term loan repaid September 2016 |
|
| — |
|
| — |
|
| 350 |
|
| 350 |
|
Fair value adjustment related to hedged fixed rate debt instruments |
|
| 3 |
|
| — |
|
| 7 |
|
| — |
|
Total long-term debt |
| $ | 1,850 |
| $ | 1,929 |
| $ | 1,819 |
| $ | 1,912 |
|
69
71
NOTE 7 – Financing Arrangements
The Company had total debt outstanding of $1.96$1.8 billion and $1.84$2.1 billion at December 31, 20162019 and 2015,2018, respectively. Short-term borrowings at December 31, 20162019 and 20152018 consist primarily of amounts outstanding under various unsecured local country operating lines of credit.
Short-term borrowings consist of the following at December 31:
|
|
|
|
|
|
|
|
(in millions) |
| 2016 |
| 2015 |
| ||
Short-term borrowings in various currencies (at rates ranging from 1% to 7% for 2016 and 2% to 6% for 2015) |
| $ | 106 |
| $ | 19 |
|
On September 22, 2016,April 12, 2019, the Company issued 3.2 percent Senior Notes due October 1, 2026 in an aggregate principal amount of $500 million. These notes are unsecured obligations ofamended and restated the Company and rank equally with all of the Company’s other existing and future unsecured, senior indebtedness. Interest on the notes is required to be paid semi-annually in arrears on April 1 and October 1 of each year, commencing April 1, 2017. The Company may redeem these notes at its option, at any time in whole or from time to time in part, at the redemption prices set forth in the supplemental indenture pursuant to which these notes were issued. The net proceeds from the sale of the notes of approximately $497 million were used to repay the $350 million due under the Company’s Term Loan Credit Agreement plus accrued interest,that was set to repay $52mature on April 25, 2019 (“Term Loan”) of $165 million to establish a 24-month senior unsecured term loan credit facility in an amount up to $500 million that matures on April 12, 2021. The Company used the $500 million of borrowings under the Company’s previously existing $1 billionnew facility to pay down amounts outstanding under its revolving credit facility and to pay off the Term Loan balance.
All borrowings under the amended term loan credit agreement for general corporate purposes.the new facility (“Amended Term Loan Credit Agreement”) bear interest at a variable annual rate based on LIBOR or a base rate, at the Company’s election, subject to the terms and conditions thereof, plus, in each case, an applicable margin. The Company is required to pay a fee on the unused availability under the Amended Term Loan Credit Agreement. The Amended Term Loan Credit Agreement contains customary representations, warranties, covenants and events of default, including covenants restricting the incurrence of liens, the incurrence of indebtedness by the Company’s subsidiaries and certain fundamental changes involving the Company and its subsidiaries, subject to certain exceptions in each case. The Company must also maintain a specified consolidated leverage ratio and consolidated interest coverage ratio. As of December 31, 2019, the Company was in compliance with these financial covenants. The occurrence of an event of default under the Amended Term Loan Credit Agreement could result in all loans and other obligations being declared due and payable and the term loan credit facility being terminated.
On October 11, 2016, the Company entered into a new five-year, senior, unsecured $1 billion revolving credit agreement (the “Revolving Credit Agreement”) that replaced ourits previously existing $1 billion senior unsecured revolving credit facility that would have matured on October 22, 2017.facility.
Subject to certain terms and conditions, the Company may increase the amount of the revolving credit facility under the Revolving Credit Agreement by up to $500 million in the aggregate. The Company may also obtain up to two2 one-year extensions of the maturity date of the Revolving Credit Agreement at its requests and subject to the agreement of the lenders. All committed pro rata borrowings under the revolving credit facility will bear interest at a variable annual rate based on the LIBOR or base rate, at the Company’s election, subject to the terms and conditions thereof, plus, in each case, an applicable margin based on the Company’s leverage ratio (as reported in the financial statements delivered pursuant to the Revolving Credit Agreement) or the Company’s credit rating. Subject to specified conditions, the Company may designate one or more of its subsidiaries as additional borrowers under the Revolving Credit Agreement provided that the Company guarantees all borrowings and other obligations of any such subsidiaries thereunder.
The Revolving Credit Agreement contains customary representations, warranties, covenants, events of default, terms and conditions, including limitationscovenants restricting on liens, incurrence of subsidiary debt and mergers.mergers, subject to certain exceptions in each case. The Company must also comply with a leverage ratio covenant and an interest coverage ratio covenant. As of December 31, 2019, the Company was in compliance with these financial covenants. The occurrence of an event of default under the Revolving Credit Agreement could result in all loans and other obligations under the agreement being declared due and payable and the revolving credit facility being terminated.
AtAs of December 31, 2016,2019, there were no$10 million in borrowings outstanding under the Revolving Credit Agreement. In addition to borrowing availability under its Revolving Credit Agreement, the Company has approximately $443$585 million of unused operating lines of credit in the various foreign countries in which it operates.
70
72
Long-termPresented below are the Company’s debt carrying amounts, net of related discounts, premiums, and debt issuance costs, consistsand fair values as of the following at December 31:
|
|
|
|
|
|
|
|
(in millions) |
| 2016 |
| 2015 |
| ||
3.2% senior notes due October 1, 2026 |
| $ | 496 |
| $ | — |
|
4.625% senior notes due November 1, 2020 |
|
| 398 |
|
| 398 |
|
1.8% senior notes due September 25, 2017 |
|
| 299 |
|
| 299 |
|
6.625% senior notes due April 15, 2037 |
|
| 254 |
|
| 254 |
|
6.0% senior notes due April 15, 2017 |
|
| 200 |
|
| 200 |
|
5.62% senior notes due March 25, 2020 |
|
| 200 |
|
| 200 |
|
U.S. revolving credit facility replaced October 2016 |
|
| — |
|
| 111 |
|
Term loan repaid September 2016 |
|
| — |
|
| 350 |
|
Fair value adjustment related to hedged fixed rate debt instrument |
|
| 3 |
|
| 7 |
|
Total |
| $ | 1,850 |
| $ | 1,819 |
|
Less: current maturities |
|
| — |
|
| — |
|
Long-term debt |
| $ | 1,850 |
| $ | 1,819 |
|
In the fourth quarter of 2015, the Company early adopted the provisions of ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30), which requires that debt issuance costs associated with a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt in the balance sheet. Accordingly, at December 31, 20162019 and 2015, debt issuance costs of $8 million and $5 million, respectively, that otherwise would have been reported as Other assets are classified as reductions of the carrying values of the related debt obligations. Deferred costs associated with the Company’s Revolving Credit Agreement remain in Other assets.2018:
| | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 | | ||||||||
| | Carrying | | Fair | | Carrying | | Fair | | ||||
(in millions) |
| Amount |
| Value |
| Amount |
| Value |
| ||||
3.2% senior notes due October 1, 2026 | | $ | 497 | | $ | 491 | | $ | 496 | | $ | 462 | |
4.625% senior notes due November 1, 2020 | | | 400 | | | 399 | | | 399 | | | 409 | |
6.625% senior notes due April 15, 2037 | | | 253 | | | 246 | | | 254 | | | 295 | |
5.62% senior notes due March 25, 2020 | | | 200 | | | 200 | | | 200 | | | 205 | |
Term loan credit agreement due April 25, 2019 | | | — | | | — | | | 165 | | | 165 | |
Term loan credit agreement due April 12, 2021 | | | 405 | | | 405 | | | — | | | — | |
Revolving credit facility | | | 10 | | | 10 | | | 418 | | | 418 | |
Fair value adjustment related to hedged fixed rate debt instrument | | | 1 | | | — | | | (1) | | | — | |
Long-term debt | | | 1,766 | | | 1,751 | | | 1,931 | | | 1,954 | |
Short-term borrowings | | | 82 | | | 82 | | | 169 | | | 169 | |
Total debt | | $ | 1,848 | | $ | 1,833 | | $ | 2,100 | | $ | 2,123 | |
The Company’s long-term debt matures as follows: $500 million in 2017, $600 million in 2020, $500 million in 2026, and $250 million in 2037. The Company’s Term Loan of $405 million matures in 2021. The Company’s long-term debt atas of December 31, 20162019 includes $200 million of 6.0 percent Senior Notes that mature on April 15, 2017the 5.62% senior notes due March 25, 2020 and $300 million of 1.8 percent Senior Notes that mature on September 25, 2017. These borrowings are included in long-term debt at December 31, 2016 as the4.625% senior notes due November 1, 2020. The Company hadhas the ability and intent to refinance thesuch senior notes on a long-term basis using the revolving credit facility or other sources prior to the respective maturity dates.date.
Ingredion IncorporatedThe Company guarantees certain obligations of its consolidated subsidiaries. The amount of the obligations guaranteed aggregated $121 million and $204$57 million at December 31, 20162019 and 2015, respectively.2018.
NOTE 8 – Leases
The Company determines if an arrangement is a lease at inception of the agreement. Operating leases are included in operating lease assets, and current and non-current operating lease liabilities in the Company’s Consolidated Balance Sheets. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease asset value includes in its calculation any prepaid lease payments made and any lease incentives received from the arrangement as a reduction of the asset. The Company’s lease terms may include options to extend or terminate the lease, and the impact of these options are included in the lease liability and lease asset calculations when the exercise of the option is at the Company’s sole discretion and it is reasonably certain that the Company will exercise that option. The Company will not separate lease and non-lease components for its leases when it is impracticable to separate the two, such as leases with variable payment arrangements. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Company has operating leases for certain rail cars, certainoffice space, warehouses, and machinery and equipment,equipment. The commencement date used for the calculation of the lease obligations recorded is the latter of the commencement date of the new standard (January 1, 2019) or the lease start date. Certain of the leases have options to extend the life of the lease, which are included in the liability calculation when the option is at the sole discretion of the Company and office space under variousit is reasonably certain that the Company will exercise the option. The Company has certain leases that have variable payments
73
based solely on output or usage of the leased asset. These variable operating lease assets are excluded from the Company’s balance sheet presentation and expensed as incurred. The Company currently has no finance leases. Rental
Lease expense underfor lease payments is recognized on a straight-line basis over the lease term. The components of lease expense were as follows:
| | | | |
Lease Cost | | Year Ended December 31, | | |
(in millions) |
| 2019 | | |
Operating lease cost | | $ | 55 | |
Variable operating lease cost | | | 24 | |
Short term lease cost | | | 3 | |
Lease cost | | $ | 82 | |
The following is a reconciliation of future undiscounted cash flows to the operating lease liabilities and the related operating lease assets as presented on the Company’s Consolidated Balance Sheet as of December 31, 2019.
| | | | |
Operating Leases | | | As of | |
(in millions) | | | December 31, 2019 | |
2020 | | $ | 49 | |
2021 | | | 39 | |
2022 | | | 30 | |
2023 | | | 23 | |
2024 | | | 15 | |
Thereafter | | | 33 | |
Total future lease payments | | | 189 | |
Less imputed interest | | | 28 | |
Present value of future lease payments | | | 161 | |
Less current lease liabilities | | | 41 | |
Non-current operating lease liabilities | | $ | 120 | |
Operating lease assets | | $ | 151 | |
Additional information related to the Company’s operating leases was $53is listed below. The standard resulted in the initial recognition of $170 million $52of total operating lease liabilities. The right-of-use assets obtained in exchange for lease liabilities for the year ended December 31, 2019 includes the initial recognition of $161 million and $47 million in 2016, 2015 and 2014, respectively. Minimumof operating lease assets as part of the adoption of the new lease standard.
74
| | | | |
Other Information | | Year Ended December 31, | | |
($ in millions) | | 2019 |
| |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 55 | |
Right-of-use assets obtained in exchange for lease liabilities: | | | | |
Operating leases | | $ | 212 | |
| | As of | | |
| | December 31, 2019 | | |
Weighted average remaining lease term: | | | | |
Operating leases | | | 5.5 years | |
Weighted average discount rate: | | | | |
Operating leases | | | 5.7 | % |
As the Company has not restated prior-year information for its adoption of ASC Topic 842, the following presents its future minimum lease payments duefor operating leases under ASC Topic 840 on non-cancellable leases existing at December 31, 2016 are shown below:2018:
|
|
|
|
| ||||
| | | | | ||||
Operating Leases | | As of | | |||||
(in millions) |
|
|
|
| | December 31, 2018 | | |
Year |
| Minimum Lease Payments |
| |||||
2017 |
| $ | 45 |
| ||||
2018 |
|
| 41 |
| ||||
2019 |
|
| 36 |
| | $ | 53 | |
2020 |
|
| 28 |
| | | 44 | |
2021 |
|
| 23 |
| | | 40 | |
Balance thereafter |
|
| 50 |
| ||||
2022 | | | 27 | | ||||
2023 | | | 22 | | ||||
Thereafter | | | 27 | | ||||
Total future lease payments | | $ | 213 | | ||||
71
NOTE 9 – Income Taxes
The components of income before income taxes and the provision for income taxes are shown below:
| | | | | | | | | | |
(in millions) |
| 2019 |
| 2018 |
| 2017 |
| |||
Income before income taxes: | | | | | | | | | | |
U.S. | | $ | 74 | | $ | 121 | | $ | 226 | |
Foreign | | | 508 | | | 500 | | | 543 | |
Total income before income taxes | | | 582 | | | 621 | | | 769 | |
Provision for income taxes: | | | | | | | | | | |
Current tax (benefit) expense: | | | | | | | | | | |
U.S. federal | | | 6 | | | 17 | | | (13) | |
State and local | | | 2 | | | 1 | | | 4 | |
Foreign | | | 147 | | | 172 | | | 179 | |
Total current tax expense | | | 155 | | | 190 | | | 170 | |
Deferred tax expense (benefit): | | | | | | | | | | |
U.S. federal | | | (8) | | | (14) | | | 77 | |
State and local | | | — | | | (2) | | | 4 | |
Foreign | | | 11 | | | (7) | | | (14) | |
Total deferred tax expense (benefit) | | | 3 | | | (23) | | | 67 | |
Total provision for income taxes | | $ | 158 | | $ | 167 | | $ | 237 | |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
| 2016 |
| 2015 |
| 2014 |
| |||
Income before income taxes: |
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 176 |
| $ | 109 |
| $ | 83 |
|
Foreign |
|
| 566 |
|
| 490 |
|
| 437 |
|
Total |
| $ | 742 |
| $ | 599 |
| $ | 520 |
|
Provision for income taxes: |
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
|
|
|
|
|
|
|
|
|
US federal |
| $ | 95 |
| $ | 26 |
| $ | 8 |
|
State and local |
|
| 8 |
|
| 3 |
|
| 1 |
|
Foreign |
|
| 148 |
|
| 164 |
|
| 159 |
|
Total current |
| $ | 251 |
| $ | 193 |
| $ | 168 |
|
Deferred tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
US federal |
| $ | 13 |
| $ | (8) |
| $ | (16) |
|
State and local |
|
| 1 |
|
| (1) |
|
| (2) |
|
Foreign |
|
| (19) |
|
| 3 |
|
| 7 |
|
Total deferred |
| $ | (5) |
| $ | (6) |
| $ | (11) |
|
Total provision for income taxes |
| $ | 246 |
| $ | 187 |
| $ | 157 |
|
75
Deferred income taxes are provided for the tax effects of temporary differences between the financial reporting basis and tax basis of assets and liabilities. Significant temporary differences atas of December 31, 2016,2019 and 20152018 are summarized as follows:
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
(in millions) |
| 2016 |
| 2015 |
|
| 2019 |
| 2018 |
| ||||
Deferred tax assets attributable to: |
|
|
|
|
|
|
| | | | | | | |
Employee benefit accruals |
| $ | 39 |
| $ | 34 |
| | $ | 23 | | $ | 20 | |
Pensions and postretirement plans |
|
| 30 |
|
| 30 |
| | | 22 | | | 23 | |
Lease liabilities | | | 39 | | | — | | |||||||
Derivative contracts |
|
| 3 |
|
| 14 |
| | | 2 | | | 1 | |
Net operating loss carryforwards |
|
| 18 |
|
| 13 |
| | | 24 | | | 26 | |
Foreign tax credit carryforwards |
|
| 4 |
|
| 3 |
| | | 1 | | | 1 | |
Other |
|
| 24 |
|
| 38 |
| |||||||
Gross deferred tax assets |
| $ | 118 |
| $ | 132 |
| | | 111 | | | 71 | |
Valuation allowance |
|
| (21) |
|
| (12) |
| |||||||
Valuation allowances | | | (29) | | | (31) | | |||||||
Net deferred tax assets |
| $ | 97 |
| $ | 120 |
| | | 82 | | | 40 | |
Deferred tax liabilities attributable to: |
|
|
|
|
|
|
| | | | | | | |
Property, plant and equipment |
| $ | 206 |
| $ | 193 |
| | | 175 | | | 177 | |
Identified intangibles |
|
| 55 |
|
| 59 |
| | | 41 | | | 39 | |
Right-of-use lease assets | | | 37 | | | — | | |||||||
Other | | | 11 | | | 3 | | |||||||
Gross deferred tax liabilities |
| $ | 261 |
| $ | 252 |
| | | 264 | | | 219 | |
Net deferred tax liabilities |
| $ | 164 |
| $ | 132 |
| | $ | 182 | | $ | 179 | |
Of the $18$24 million of tax-effected net operating loss carryforwards atas of December 31, 2016,2019, approximately $8$9 million are for state loss carryforwards and approximately $15 million are for foreign loss carryforwards. Of the $26 million of tax-effected net operating loss carryforwards as of December 31, 2018, approximately $11 million are for state loss carryforwards and approximately $15 million are for foreign loss carryforward. Income tax accounting requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making this assessment, management considers the level of historical taxable income, scheduled reversal of deferred tax liabilities, tax planning strategies, tax carryovers and projected future taxable income. AtAs of December 31, 2016,2019, the Company maintained valuation allowances of $9 million for state loss carryforwards, $4 million for state credits, $1 million for state section 163(j) limitations, $1 million for foreign tax credits and $13 million for foreign loss carryforwards all of which management has determined will more likely than not expire prior to realization. As of December 31, 2018, the Company maintains valuation allowances of $8$11 million for state loss carryforwards, $2$3 million for state credits and $9$14 million for foreign loss carryforwards thatall of which management has determined will more likely than not expire prior to realization. In addition, the companyCompany maintains valuation allowances on foreign subsidiariessubsidiaries’ net deferred tax assets of $2 million.$1 million and $3 million, for the years ended December 31, 2019 and 2018, respectively.
72
A reconciliation of the USU.S. federal statutory tax rate to the Company’s effective tax rate follows:
| | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
|
Provision for tax at U.S. statutory rate | | 21.0 | % | 21.0 | % | 35.0 | % |
Tax rate difference on foreign income | | 5.8 | | 5.3 | | (5.6) | |
Net impact of tax benefit of intercompany financings | | (1.2) | | (0.8) | | (0.8) | |
Net impact of global intangible low-taxed income (“GILTI”) | | 1.2 | | 1.0 | | — | |
Net impact of U.S. foreign tax credits | | 1.0 | | 0.5 | | 0.3 | |
Net impact of U.S.-Canada tax settlement | | — | | 0.3 | | (1.3) | |
Net impact of valuation allowance in Argentina | | 0.3 | | 1.0 | | 2.0 | |
Net impact of transition tax | | — | | 0.6 | | 2.7 | |
Net impact of U.S. deferred tax remeasurement | | — | | — | | (4.9) | |
Net impact of provision for taxes on unremitted earnings | | — | | 0.3 | | 4.3 | |
Other items, net | | (1.0) | | (2.3) | | (0.9) | |
Provision at effective tax rate | | 27.1 | % | 26.9 | % | 30.8 | % |
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| 2014 |
|
Provision for tax at US statutory rate |
| 35.00 | % | 35.00 | % | 35.00 | % |
Tax rate difference on foreign income |
| (5.51) |
| (5.75) |
| (6.26) |
|
State and local taxes — net |
| 0.33 |
| 0.28 |
| 0.13 |
|
Nondeductible goodwill impairment — Southern Cone |
| — |
| — |
| 2.18 |
|
Tax impact of fluctuations in Mexican Pesos to US Dollar |
| 2.40 |
| 2.87 |
| 1.30 |
|
Net tax impact of US foreign tax credits |
| (2.33) |
| 0.93 |
| (0.31) |
|
Net tax impact of US / Canada settlement |
| 3.17 |
| — |
| — |
|
Other items — net |
| 0.06 |
| (2.11) |
| (1.85) |
|
Provision at effective tax rate |
| 33.12 | % | 31.22 | % | 30.19 | % |
76
The Company has significant operations in Canada, Mexico, Pakistan and PakistanColombia where the 2019 statutory tax rates are 25 percent, 30 percent, 29 percent and 3133 percent, in 2016, respectively. In addition, the Company's subsidiary in Brazil has a statutory tax rate of 34 percent before local incentives that vary each year.
The Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017. The TCJA introduced numerous changes in the U.S. federal tax laws. Changes that have a significant impact on the Company’s effective tax rate are a reduction in the U.S. corporate tax rate from 35 percent to 21 percent, the imposition of a U.S. tax on global intangible low-taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) deduction. The TCJA also provided for a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017 and eliminated the tax on dividends from foreign subsidiaries by allowing a 100-percent dividends received deduction.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to provide guidance on the application of GAAP to situations in which the registrant does not have all the necessary information available, prepared or analyzed (including computations) in sufficient detail to complete the accounting for the income tax effects of the TCJA.
In the fourth quarter of 2017, the Company usescalculated a provisional impact of the US dollarTCJA in accordance with SAB 118 and its understanding of the TCJA, including published guidance as of December 31, 2017. During the third and fourth quarter of 2018, the Company recorded $2 million and $1 million, respectively, of net incremental tax expense, as the functional currency forCompany finalized its subsidiaries in Mexico. BecauseTCJA expense based on additional guidance from federal and state regulatory agencies. The following table summarizes the provisional and final impact of the declineTCJA:
| | | | | | | |
| | Provisional 2017 | | Final 2017 | | ||
(in millions) |
| TCJA Impact | | TCJA Impact | | ||
One-time transition tax | | $ | 21 | | $ | 25 | |
Remeasurement of deferred tax assets and liabilities | | | (38) | | | (38) | |
Net impact of provision for taxes on unremitted earnings | | | 33 | | | 35 | |
Other items, net | | | 7 | | | 4 | |
Net impact of the TCJA | | $ | 23 | | $ | 26 | |
Pro-forma results related to TCJA have not been presented, as the effect would not be material to the Company’s results for the periods presented.
Under a provision in the valueTCJA, all of the Mexican peso versusundistributed earnings of the US dollar in 2016Company’s foreign subsidiaries were deemed to be repatriated at December 31, 2017 and 2015, the Mexicanwere subjected to a transition tax. As a result, a provisional transition tax provision includes increased tax expenseliability of approximately $18$21 million, or 2.42.7 percentage points on the effective tax rate, was recorded in 2016,income from continuing operations in the fourth quarter of 2017. During the third quarter of 2018, the Company finalized the transition tax analysis and $17recorded an incremental $4 million liability, or 0.6 percentage points on the effective tax rate.
As a result of the reduction in the U.S. corporate tax rate, the Company recorded a tax benefit of $38 million, or 2.874.9 percentage points on the effective tax rate, due to the remeasurement of its U.S. net deferred tax liabilities, in 2015. These impacts are largely associatedthe fourth quarter of 2017.
Due to a change in the U.S. tax treatment of dividends received from foreign subsidiaries, in the fourth quarter of 2017, the Company recorded a provisional tax liability of $33 million, or 4.3 percentage points on the effective tax rate, for foreign dividend withholding and state income taxes payable upon the distribution of unremitted earnings from certain foreign subsidiaries from which it expected to receive cash distributions in 2018 and beyond. During the second half of 2018, the Company finalized the provision for taxes on unremitted earnings and recorded an additional $2 million liability, or 0.3 percentage points on the effective rate.
The net impact of the TCJA on the Company’s 2017 tax expense included a provisional tax liability of $7 million, or 0.9 percentage points on the effective tax rate (included in other items, net), for the difference in its 2017 tax expense as calculated with foreign currency translation gains for localand without the changes triggered by the TCJA. During the second half of 2018, the Company finalized other items, net and recorded a net $3 million benefit, or 0.4 percentage points on the effective tax purposesrate.
In the fourth quarter of 2018, the Company made an accounting election to treat taxes due on net US dollar monetary assets heldfuture U.S. inclusions in Mexico for which there is no corresponding gain in pre-tax income.taxable income related to GILTI as a current-period expense when incurred (the “period cost method”)
77
The Company hashad been pursuing relief from double taxation under the US and CanadianU.S.-Canada tax treaty for the years 2004 through 2013. During the fourth quarter of 2016, a tentative agreementsettlement was reached between the USU.S. and Canada forand, consequently, the specific issues being contested. The Company has established a net reserve of $24 million, including interest thereon, recorded as a $70 million cost and a $46 million benefit, or 3.173.2 percentage points on the effective tax rate in 2016.rate. In addition, as a result of the settlement, for the years 2014-2016,2014 through 2016, the Company hashad established a net reserve forof $7 million, or 0.971.0 percentage points on the effective tax rate in 2016. Of this amount, $4 million pertains to 2016.
During 2015, an audit was settled at a National Starch subsidiary related to a pre-acquisition period for which we are indemnified by Akzo Nobel N.V. (“Akzo”). In the third quarter of 2014,2017, the two countries finalized the agreement, which eliminated the double taxation, and the Company recognized increasedpaid $63 million to the U.S. Internal Revenue Service to settle the liability. As a result of that agreement, the Company was entitled to a net tax expensebenefit of $10 million primarily due to reserve approximately $7 million ($5 million ofa foreign exchange loss deduction on its 2017 U.S. federal income tax and $2 million of interest)return, or 1.3 percentage points inon the effective tax rate. As a result of the final settlement, the Company received refunds totaling $42 million from Canadian revenue agencies and recorded $2 million, or 0.3 percentage points on the effective tax rate, forof interest and penalties through tax expense in 2018.
During 2019, the audit. InCompany increased the third quartervaluation allowance on the net deferred tax assets in Argentina. As a result, the Company recorded a valuation allowance in the amount of 2015 the reserve was reduced by approximately $4$2 million, ($3 million of tax and $1 million of interest) which resulted in a decrease of 0.7or 0.3 percentage points inon the 2015 effective tax rate. These impacts are includedrate, compared to $6 million, or 1.0 percentage points on the effective tax rate, and $16 million, or 2.0 percentage points on the effective tax rate in the rate reconciliation as “Other”. The $7 million2018 and 2017, respectively.
As of December 31, 2017, for U.S. tax expense and $4 million of reduced tax expense were recorded in the tax provisionpurposes all of the subsidiary, whileundistributed earnings and profits of the reimbursement from Akzo under the indemnity is recorded as other income, which results in no impact in net income for all periods.
Provisions are made for estimated US and foreign income taxes, less credits that may be available, on distributions fromCompany’s foreign subsidiaries were deemed to be repatriated and subjected to a transition tax. In addition, during 2017 and 2018 the extent dividends are anticipated. No provision has been madeCompany recorded a liability of $33 million and $2 million, respectively, for foreign withholding and state income taxes on certain unremitted earnings from foreign subsidiaries. However, the Company has not provided for foreign withholding taxes, state income taxes and federal and state taxes on foreign currency gains/losses on distributions of approximately $2.7$3.0 billion of undistributedunremitted earnings of the Company’s foreign subsidiaries at December 31, 2016, as such amounts are considered permanently reinvested. It is not practicable to estimate the additional income taxes, including applicable foreign withholding taxes and credits that would be due upon the repatriation of these earnings.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for 20162019 and 20152018 is as follows:
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
(in millions) |
| 2016 |
| 2015 |
| | 2019 |
| 2018 |
| ||||
Balance at January 1 |
| $ | 12 |
| $ | 23 |
| | $ | 30 | | $ | 39 | |
Additions for tax positions related to prior years |
|
| 72 |
|
| — |
| | | — | | | — | |
Reductions for tax positions related to prior years |
|
| (9) |
|
| (10) |
| | | — | | | (2) | |
Additions based on tax positions related to the current year |
|
| 12 |
|
| 1 |
| | | — | | | — | |
Settlements | | | — | | | — | | |||||||
Reductions related to a lapse in the statute of limitations |
|
| (1) |
|
| (2) |
| | | (8) | | | (7) | |
Balance at December 31 |
| $ | 86 |
| $ | 12 |
| | $ | 22 | | $ | 30 | |
73
Of the $86$22 million of unrecognized tax benefits atas of December 31, 2016, $292019, $5 million represents the amount that, if recognized, could affect the effective tax rate in future periods. The remaining $57$17 million includes an offset of $52$15 million for an income tax receivable and $4$1 million of federal benefit that would be created as part of the Canada and US processU.S.-Canada tax settlement described previously. The remaining benefit is a $1 million foreign tax credit.
The Company accounts for interest and penalties related to income tax matters within the provision for income taxes. The Company has accrued $9$2 million of interest expense related to the unrecognized tax benefits as of December 31, 2016.2019. The accrued interest expense was $4$2 million as of December 31, 2015.2018.
The Company is subject to USU.S. federal income tax as well as income tax in multiple statestates and non-USnon-U.S. jurisdictions. The USU.S. federal tax returns are subject to audit for the years 2013 to 2016.2016 through 2019. In general, the Company’s foreign subsidiaries remain subject to audit for years 20102013 and later.
It is also reasonably possible that the total amount of unrecognized tax benefits including interest and penalties will increase or decrease within twelve12 months of December 31, 2016.2019. The Company believes it is reasonably possible approximately $9 million of unrecognized tax benefits may be recognized within 12 months of December 31, 2019 as a result of a lapse of the statute of limitations, of which $2 million, could affect the effective tax rate. The Company has classified $72 millionnone of the unrecognized tax benefits as current because they are not expected to be resolved within the next twelve12 months. Of the $72 million, $26 million represents the amount that if recognized, could affect the effective tax rate in future periods.
78
NOTE 10 – Benefit Plans
The Company and its subsidiaries sponsor noncontributory defined benefit pension plans (qualified and non-qualified) covering a substantial portion of employees in the United StatesU.S. and Canada, and certain employees in other foreign countries. Plans for most salaried employees provide pay-related benefits based on years of service. Plans for hourly employees generally provide benefits based on flat dollar amounts and years of service. The Company’s general funding policy is to make contributions to the plans in amounts that comply with minimum funding requirements and are within the limits of deductibility under current tax regulations. Certain foreign countries allow income tax deductions without regard to contribution levels, and the Company’s policy in those countries is to make contributions required by the terms of the applicable plan.
Included in the Company’s pension obligation are nonqualified supplemental retirement plans for certain key employees. Benefits provided under these plans are only partially funded,unfunded and payments to plan participants are made directly by the Company.
The Company also provides healthcare and/or life insurance benefits for retired employees in the United States,U.S., Canada, and Brazil. Healthcare benefits for retirees outside of the United States,U.S., Canada, and Brazil are generally covered through local government plans.
On December 31, 2016, the Company merged its existing US qualified pension plans into the Ingredion Incorporated Cash Balance Plan for Salaried Employees. The Ingredion Incorporated Cash Balance Plan for Salaried Employees was renamed the Ingredion Pension Plan (“Combined Plan”). Certain US salaried employees are covered by a component of the Combined Plan which provides benefits based on service credits to the participating employees’ accounts of between 3 percent and 10 percent of base salary, bonus and overtime. On January 1, 2017, the Company amended this component of the Combined Plan to eliminate the service credit percentage increases and freeze them at the January 1, 2017 rate for eligible salaried employees. The amendment also impacted the nonqualified supplemental retirement plans. The plan amendment resulted in a reduction of the benefit obligation of $5 million as of December 31, 2016. The benefit will be recognized over the remaining life of the plan as a prior service cost benefit.
In April 2016, the Company performed a pension remeasurement for one of its pension plans in Canada as a result of lump sum settlement payments made related to the Port Colborne plant sale. This plan settlement resulted in a reduction in the funded status of the Plan by $5 million. The Company recorded a pension charge of $1 million as a result of the settlement.
During the first quarter of 2015, the Company amended one of its pension plans in Canada to eliminate future benefit accruals for the plan effective April 30, 2015. This plan curtailment resulted in an improvement in the funded status of the plan by approximately $9 million in the first quarter. The impact of this plan curtailment on net periodic benefit cost for the year ended December 31, 2015 was not significant. Also during the first quarter of 2015, the Company acquired certain pension and postretirement obligations and related assets as part of the Penford acquisition.
74
In the fourth quarter of 2014, the Company amended its retiree medical plan in the US for salaried employees. This amendment provided that employees were required to meet certain age and years of service requirements through December 31, 2014 in order to continue to participate in the plan. As such, the number of eligible employees was significantly reduced. Eligible US salaried employees are provided with access to postretirement medical insurance through retirement healthcare spending accounts. US salaried employees accrue an account during employment, which can be used after employment to purchase postretirement medical insurance from the Company prior to age 65 and Medigap or Medicare HMO policies after age 65. The accounts are credited with a flat dollar amount and indexed for inflation annually during employment. These credits ceased after December 31, 2014. The accounts also accrue interest credits using a rate equal to a specified amount above the yield on five-year US Treasury notes. Employees can use the amounts accumulated in these accounts, including credited interest, to purchase postretirement medical insurance. Employees became eligible for benefits when they met minimum age and service requirements. The Company recognizes the cost of these postretirement benefits by accruing a flat dollar amount on an annual basis for each eligible US salaried employee.
Pension Obligation and Funded Status --Status: The changes in pension benefit obligations and plan assets during 2016the years ended December 31, 2019 and 2015,2018, as well as the funded status and the amounts recognized in the Company’s Consolidated Balance Sheets related to the Company’s pension plans at December 31, 20162019, and 2015,2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| US Plans |
| Non-US Plans |
| |||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | U.S. Plans | | Non-U.S. Plans | | |||||||||||||||||||||
(in millions) |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| | 2019 | | 2018 | | 2019 | | 2018 |
| ||||||||
Benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
At January 1 |
| $ | 359 |
| $ | 314 |
| $ | 219 |
| $ | 267 |
| | $ | 357 | | $ | 393 | | $ | 223 | | $ | 248 | |
Service cost |
|
| 6 |
|
| 8 |
|
| 3 |
|
| 4 |
| | | 5 | | | 6 | | | 3 | | | 3 | |
Interest cost |
|
| 14 |
|
| 14 |
|
| 10 |
|
| 12 |
| | | 14 | | | 13 | | | 10 | | | 10 | |
Benefits paid |
|
| (16) |
|
| (15) |
|
| (15) |
|
| (11) |
| | | (28) | | | (26) | | | (11) | | | (12) | |
Actuarial loss (gain) |
|
| 10 |
|
| (26) |
|
| 6 |
|
| (4) |
| | | 39 | | | (27) | | | 24 | | | (8) | |
Business combinations / transfers |
|
| — |
|
| 73 |
|
| — |
|
| — |
| |||||||||||||
Curtailment / settlement / amendments |
|
| (6) |
|
| (9) |
|
| (5) |
|
| (11) |
| |||||||||||||
Curtailment/settlement/amendments | | | — | | | (2) | | | (2) | | | — | | |||||||||||||
Foreign currency translation |
|
| — |
|
| — |
|
| 5 |
|
| (38) |
| | | — | | | — | | | 7 | | | (18) | |
Benefit obligation at December 31 |
| $ | 367 |
| $ | 359 |
| $ | 223 |
| $ | 219 |
| | $ | 387 | | $ | 357 | | $ | 254 | | $ | 223 | |
| | | | | | | | | | | | | | |||||||||||||
Fair value of plan assets |
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|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
At January 1 |
| $ | 354 |
| $ | 313 |
| $ | 206 |
| $ | 232 |
| | $ | 353 | | $ | 404 | | $ | 207 | | $ | 235 | |
Actual return on plan assets |
|
| 20 |
|
| (2) |
|
| 11 |
|
| 16 |
| | | 82 | | | (25) | | | 24 | | | — | |
Employer contributions |
|
| 10 |
|
| 11 |
|
| 7 |
|
| 5 |
| | | 1 | | | 2 | | | 7 | | | 4 | |
Benefits paid |
|
| (16) |
|
| (15) |
|
| (15) |
|
| (11) |
| | | (28) | | | (26) | | | (11) | | | (12) | |
Plan settlements |
|
| — |
|
| (9) |
|
| (5) |
|
| — |
| | | — | | | (2) | | | (3) | | | — | |
Business combinations |
|
| — |
|
| 56 |
|
| — |
|
| — |
| |||||||||||||
Foreign currency translation |
|
| — |
|
| — |
|
| 7 |
|
| (36) |
| | | — | | | — | | | 7 | | | (20) | |
Fair value of plan assets at December 31 |
| $ | 368 |
| $ | 354 |
| $ | 211 |
| $ | 206 |
| | $ | 408 | | $ | 353 | | $ | 231 | | $ | 207 | |
| | | | | | | | | | | | | | |||||||||||||
Funded status |
| $ | 1 |
| $ | (5) |
| $ | (12) |
| $ | (13) |
| | $ | 21 | | $ | (4) | | $ | (23) | | $ | (16) | |
Amounts recognized in the Consolidated Balance Sheets as of December 31, 20162019 and 20152018, were as follows:
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| |||||||||||||
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| US Plans |
| Non-US Plans |
| |||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | U.S. Plans | | Non-U.S. Plans | | |||||||||||||||||||||
(in millions) |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||||
Non-current asset |
| $ | 12 |
| $ | 18 |
| $ | 29 |
| $ | 32 |
| | $ | 32 | | $ | 7 | | $ | 31 | | $ | 32 | |
Current liabilities |
|
| (1) |
|
| (1) |
|
| (1) |
|
| (3) |
| | | (1) | | | (1) | | | (2) | | | (1) | |
Non-current liabilities |
|
| (10) |
|
| (22) |
|
| (40) |
|
| (42) |
| | | (10) | | | (10) | | | (52) | | | (47) | |
Net asset (liability) recognized |
| $ | 1 |
| $ | (5) |
| $ | (12) |
| $ | (13) |
| | $ | 21 | | $ | (4) | | $ | (23) | | $ | (16) | |
75
79
Amounts recognized in accumulated other comprehensive loss, excluding tax effects, that have not yet been recognized as components of net periodic benefit cost at December 31, 20162019 and 20152018, were as follows:
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| |||||||||||||
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| US Plans |
| Non-US Plans |
| |||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | U.S. Plans | | Non-U.S. Plans | | |||||||||||||||||||||
(in millions) |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||||
Net actuarial loss |
| $ | 28 |
| $ | 19 |
| $ | 52 |
| $ | 48 |
| | $ | 15 | | $ | 40 | | $ | 62 | | $ | 57 | |
Transition obligation |
|
| — |
|
| — |
|
| 1 |
|
| 2 |
| | | — | | | — | | | 1 | | | 1 | |
Prior service credit |
|
| (6) |
|
| (2) |
|
| (1) |
|
| (1) |
| | | (6) | | | (6) | | | — | | | (1) | |
Net amount recognized |
| $ | 22 |
| $ | 17 |
| $ | 52 |
| $ | 49 |
| | $ | 9 | | $ | 34 | | $ | 63 | | $ | 57 | |
The increasedecrease in the net amount recognized in accumulated comprehensive loss at December 31, 20162019, for the US plans and Non-USU.S. plans as compared to December 31, 2015,2018, is largelymainly due to the actual return on assets exceeding the expected return on assets. This is partially offset by the effect of the decrease in discount rates used to measure the Company’s obligations under its U.S. pension plan, with an offsetplans.
The increase in the US plansnet amount recognized in accumulated comprehensive loss at December 31, 2019, for the effect of the service cost amendmentNon-U.S. plans, as compared to December 31, 2018, is mainly due to the Combined Plan described above. decrease in discount rates used to measure the Company’s obligations under its Non-U.S. pension plans. This is partially offset by the actual return on assets exceeding the expected return on assets.
The accumulated benefit obligation for all defined benefit pension plans was $555$601 million and $541$543 million at December 31, 20162019 and 2015,2018, respectively.
Information about plan obligations and assets for plans with an accumulated benefit obligation in excess of plan assets is as follows:
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|
|
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| |||||||||||||
|
| US Plans |
| Non-US Plans |
| |||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | U.S. Plans | | Non-U.S. Plans | | |||||||||||||||||||||
(in millions) |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| | 2019 | | 2018 | | 2019 | | 2018 |
| ||||||||
Projected benefit obligation |
| $ | 11 |
| $ | 164 |
| $ | 43 |
| $ | 47 |
| | $ | 11 | | $ | 11 | | $ | 56 | | $ | 49 | |
Accumulated benefit obligation |
|
| 10 |
|
| 158 |
|
| 36 |
|
| 38 |
| | | 10 | | | 9 | | | 45 | | | 41 | |
Fair value of plan assets |
|
| — |
|
| 141 |
|
| 2 |
|
| 2 |
| | | — | | | — | | | 2 | | | 2 | |
All U.S. plans and most non-U.S. plans value the vested benefit obligation based on the actuarial present value of the vested benefits to which employees are currently entitled based on employees’ expected date of separation or retirement.
Components of net periodic benefit cost consist of the following for the years ended December 31, 2016, 20152019, 2018, and 2014:2017:
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| |||||||||||||||||||||
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| |||||||||||||||||||||
|
|
| US Plans |
| Non-US Plans |
|
| |||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
| | | Year Ended December 31, | | ||||||||||||||||||||||||||||||||||||||
| | | U.S. Plans | | Non-U.S. Plans | | ||||||||||||||||||||||||||||||||||||
(in millions) |
|
| 2016 |
| 2015 |
| 2014 |
| 2016 |
| 2015 |
| 2014 |
|
|
|
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
| |||||||||||||
Service cost |
|
| $ | 6 |
| $ | 8 |
| $ | 7 |
| $ | 3 |
| $ | 4 |
| $ | 6 |
|
| | | $ | 5 | | $ | 6 | | $ | 6 | | $ | 3 | | $ | 3 | | $ | 3 | | |
Interest cost |
|
|
| 14 |
|
| 14 |
|
| 13 |
|
| 10 |
|
| 12 |
|
| 14 |
|
| | | 14 | | | 13 | | | 13 | | | 10 | | | 10 | | | 11 | | ||
Expected return on plan assets |
|
|
| (20) |
|
| (24) |
|
| (21) |
|
| (10) |
|
| (13) |
|
| (14) |
|
| | | (18) | | | (21) | | | (21) | | | (8) | | | (9) | | | (10) | | ||
Amortization of actuarial loss |
|
|
| 1 |
|
| 1 |
|
| 1 |
|
| 2 |
|
| 3 |
|
| 3 |
|
| | | 1 | | | — | | | — | | | 2 | | | 2 | | | 2 | | ||
Settlement loss (gain) |
|
|
| — |
|
| (1) |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| |||||||||||||||||||||
Amortization of prior service credit | | | | (1) | | | — | | | (1) | | | — | | | — | | | — | | ||||||||||||||||||||||
Net periodic benefit cost |
|
| $ | 1 |
| $ | (2) |
| $ | — |
| $ | 6 |
| $ | 6 |
| $ | 9 |
|
| | | $ | 1 | | $ | (2) | | $ | (3) | | $ | 7 | | $ | 6 | | $ | 6 | | |
The service cost component of net periodic benefit cost is presented within either cost of sales or operating expenses on the Consolidated Statements of Income. The interest cost, expected return on plan assets, amortization of actuarial loss, amortization of prior service credit and settlement loss components of net periodic benefit cost are presented as other, non-operating income on the Consolidated Statements of Income.
For the USU.S. plans, the Company estimates that net periodic benefit cost for 2017the year ending December 31, 2020 will include approximately $1 million relating to the amortization of its accumulated actuarial gainthe prior service credit included in accumulated other comprehensive loss atas of December 31, 2016.2019.
80
For the non-USnon-U.S. plans, the Company estimates that net periodic benefit cost for 2017the year ending December 31, 2020 will include approximately $2 million relating to the amortization of its accumulated actuarial loss.
Actuarial gains and losses in excess of 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets are recognized as a component of net periodic benefit cost over the average remaining service period of a plan’s active employees for active defined benefit pension plans and over the average remaining life of a plan’s active employees for frozen defined benefit pension plans.
76
Total amounts recorded in other comprehensive income and net periodic benefit cost during 2016 was as follows:
|
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|
|
|
|
|
| |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||
(in millions, pre-tax) |
| US Plans |
| Non-US Plans |
|
| U.S. Plans |
| Non-U.S. Plans | | ||||||||||||||||
Net actuarial loss |
| $ | 10 |
| $ | 6 |
| |||||||||||||||||||
New prior service cost |
|
| (6) |
|
| (1) |
| |||||||||||||||||||
| | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | |||||||||||||
Net actuarial (gain) loss | | $ | (25) | | $ | 19 | | $ | (7) | | $ | 7 | | $ | 4 | | $ | (3) | | |||||||
Prior service cost | | | — | | | — | | | — | | | 1 | | | — | | | — | | |||||||
Amortization of actuarial loss |
|
| (1) |
|
| (2) |
| | | (1) | | | — | | | — | | | (2) | | | (2) | | | (2) | |
Amortization of prior service credit | | | 1 | | | — | | | 1 | | | — | | | — | | | — | | |||||||
Total recorded in other comprehensive income |
|
| 3 |
|
| 3 |
| | | (25) | | | 19 | | | (6) | | | 6 | | | 2 | | | (5) | |
Net periodic benefit cost |
|
| 1 |
|
| 6 |
| | | 1 | | | (2) | | | (3) | | | 7 | | | 6 | | | 6 | |
Total recorded in other comprehensive income and net periodic benefit cost |
| $ | 4 |
| $ | 9 |
| | $ | (24) | | $ | 17 | | $ | (9) | | $ | 13 | | $ | 8 | | $ | 1 | |
The following weighted average assumptions were used to determine the Company’s obligations under the pension plans:
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|
|
|
|
|
|
| |||||||||
|
| US Plans |
| Non-US Plans |
| |||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| |||||||||
| | | | | | | | | | |||||||||
| | U.S. Plans | | Non-U.S. Plans | | |||||||||||||
| | 2019 | | 2018 | | 2019 | | 2018 |
| |||||||||
Discount rate |
| 4.30 | % | 4.54 | % | 4.34 | % | 4.57 | % | | 3.34 | % | 4.38 | % | 3.55 | % | 4.33 | % |
Rate of compensation increase |
| 4.54 | % | 4.71 | % | 3.62 | % | 3.73 | % | | 4.21 | | 4.31 | | 3.75 | | 3.63 | |
The following weighted average assumptions were used to determine the Company’s net periodic benefit cost for the pension plans:
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| |||||||||||||
|
| US Plans |
| Non-US Plans |
| |||||||||||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| 2016 |
| 2015 |
| 2014 |
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | U.S. Plans | | Non-U.S. Plans | | |||||||||||||||||||||
| | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| |||||||||||||
Discount rate |
| 4.30 | % | 4.00 | % | 4.60 | % | 4.57 | % | 4.47 | % | 5.60 | % | | 4.38 | % | 3.70 | % | 4.30 | % | 4.33 | % | 4.02 | % | 4.34 | % |
Expected long-term return on plan assets |
| 5.75 | % | 7.00 | % | 7.25 | % | 5.41 | % | 6.48 | % | 6.82 | % | | 5.30 | | 5.30 | | 5.75 | | 4.37 | | 4.31 | | 5.29 | |
Rate of compensation increase |
| 4.71 | % | 4.31 | % | 4.22 | % | 3.73 | % | 3.76 | % | 4.39 | % | | 4.31 | | 4.42 | | 4.54 | | 3.63 | | 3.58 | | 3.62 | |
For 2017 and 2016,the year ended December 31, 2019, the Company has assumed an expected long-term rate of return on assets of 5.755.30 percent in both years for USU.S. plans and approximately 4.76 percent and 5.003.86 percent for Canadian plans, respectively.plans. In developing the expected long-term rate of return assumption on plan assets, which consist mainly of USU.S. and Canadian equitydebt and debtequity securities, management evaluated historical rates of return achieved on plan assets and the asset allocation of the plans, input from the Company’s independent actuaries and investment consultants, and historical trends in long-term inflation rates. Projected return estimates made by such consultants are based upon broad equity and bond indices. The decrease in expected US and Non-US plan long-term rates of return on assets compared to 2015 is due to the change in our investment approach and related asset allocation in the US and Canada that occurred during 2016 to a liability-driven investment approach. As a result, a higher proportion of investments are in interest-sensitive investments (fixed income) as compared to the prior investment strategy for the US and Canada pension plans.
The discount rate reflects a rate of return on high-quality fixed income investments that match the duration of the expected benefit payments. The Company has typically used returns on long-term, high-quality corporate AA bonds as a benchmark in establishing this assumption. In 2016, we changed the method used to estimate the service and interest cost components of net periodic benefit cost for certain of our defined benefit pension and postretirement benefit plans. Historically, we estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2016, we have electedThe Company elects to use a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
Plan Assets --Assets: The Company’s investment policy for its pension plans is to balance risk and return through diversified portfolios of fixed income securities, equity instruments, and short-term investments. Maturities for fixed income securities are managed such that sufficient liquidity exists to meet near-term benefit payment obligations. In 2016, the Company changed our investment approach for the US and Canada plans due to the funded nature of the plans to a liability-driven investment approach. As a result, a higher proportion of investments are in interest rate-sensitive investments (fixed income) as compared to the prior investment strategy. For USU.S. pension plans, the weighted average target range allocation of assets was 20-4015-25 percent in equities 57-79and 75-85 percent in fixed income and 1-3 percent in cash andinclusive of other short-term investments. The asset allocation is reviewed regularly, and portfolio investments are rebalanced to the targeted allocation when considered appropriate.
77
81
The Company’s weighted average asset allocation as of December 31, 20162019, and 20152018, for USU.S. and non-USnon-U.S. pension plan assets is as follows:
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| |||||||||
|
| US Plans |
| Non-US Plans |
| |||||||||||||
| | | | | | | | | | |||||||||
| | U.S. Plans | | Non-U.S. Plans | | |||||||||||||
Asset Category |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| | 2019 | | 2018 | | 2019 | | 2018 |
|
Equity securities |
| 38 | % | 62 | % | 41 | % | 49 | % | | 21 | % | 19 | % | 17 | % | 16 | % |
Debt securities |
| 61 | % | 37 | % | 44 | % | 38 | % | | 78 | | 80 | | 63 | | 64 | |
Cash and other |
| 1 | % | 1 | % | 15 | % | 13 | % | | 1 | | 1 | | 20 | | 20 | |
Total |
| 100 | % | 100 | % | 100 | % | 100 | % | | 100 | % | 100 | % | 100 | % | 100 | % |
The fair values of the Company’s plan assets at December 31, 2016, by asset category and level in the fair value hierarchy are as follows:
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| Fair Value Measurements at December 31, 2016 |
| |||||||||
|
| Quoted Prices |
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| |
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| in Active |
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| |
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| Markets for |
| Significant |
| Significant |
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| ||
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| Identical |
| Observable |
| Unobservable |
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| ||
Asset Category |
| Assets |
| Inputs |
| Inputs |
|
|
|
| ||
(in millions) |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total |
| |||
US Plans: |
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Equity index: |
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|
US (a) |
|
|
|
| $ | 70 |
|
|
| $ | 70 |
|
International (b) |
|
|
|
|
| 68 |
|
|
|
| 68 |
|
Fixed income index: |
|
|
|
|
|
|
|
|
|
|
|
|
Long bond (c) |
|
|
|
|
| 227 |
|
|
|
| 227 |
|
Cash (d) |
|
|
|
|
| 3 |
|
|
|
| 3 |
|
Total US Plans |
|
|
|
| $ | 368 |
|
|
| $ | 368 |
|
Non-US Plans: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity index: |
|
|
|
|
|
|
|
|
|
|
|
|
US (a) |
|
|
|
| $ | 11 |
|
|
| $ | 11 |
|
Canada (e) |
|
|
|
|
| 21 |
|
|
|
| 21 |
|
International (b) |
|
|
|
|
| 49 |
|
|
|
| 49 |
|
Real estate (f) |
|
|
|
|
| 5 |
|
|
|
| 5 |
|
Fixed income index: |
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate bond (g) |
|
|
|
|
| 21 |
|
|
|
| 21 |
|
Long bond (h) |
|
|
|
|
| 72 |
|
|
|
| 72 |
|
Other (i) |
|
|
|
|
| 23 |
|
|
|
| 23 |
|
Cash (d) |
|
| 1 |
|
| 8 |
|
|
|
| 9 |
|
Total Non-US Plans |
| $ | 1 |
| $ | 210 |
|
|
| $ | 211 |
|
| | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2019 | | ||||||||||
(in millions) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
U.S. Plans: | | | | | | | | | | | | | |
Equity index: | | | | | | | | | | | | | |
U.S. (a) | | $ | — | | $ | 43 | | $ | — | | $ | 43 | |
International (b) | | | — | | | 42 | | | — | | | 42 | |
Fixed income index: | | | | | | | | | | | | | |
Long bond (c) | | | — | | | 295 | | | — | | | 295 | |
Long government bond (d) | | | — | | | 25 | | | — | | | 25 | |
Cash (e) | | | — | | | 3 | | | — | | | 3 | |
Total U.S. Plans | | $ | — | | $ | 408 | | $ | — | | $ | 408 | |
Non-U.S. Plans: | | | | | | | | | | | | | |
Equity index: | | | | | | | | | | | | | |
U.S. (a) | | $ | — | | $ | 22 | | $ | — | | $ | 22 | |
International (b) | | | — | | | 17 | | | — | | | 17 | |
Fixed income index: | | | | | | | | | | | | | |
Intermediate bond (h) | | | — | | | 52 | | | — | | | 52 | |
Long bond (i) | | | — | | | 95 | | | — | | | 95 | |
Other (j) | | | — | | | 24 | | | — | | | 24 | |
Cash (e) | | | 2 | | | 19 | | | — | | | 21 | |
Total Non-U.S. Plans | | $ | 2 | | $ | 229 | | $ | — | | $ | 231 | |
82
| | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2018 | | ||||||||||
(in millions) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | | ||||
U.S. Plans: | | | | | | | | | | | | | |
Equity index: | | | | | | | | | | | | | |
U.S. (a) | | $ | — | | $ | 33 | | $ | — | | $ | 33 | |
International (l) | | | — | | | 35 | | | — | | | 35 | |
Fixed income index: | | | | | | | | | | | | | |
Long bond (c) | | | — | | | 258 | | | — | | | 258 | |
Long govt bond (d) | | | — | | | 24 | | | — | | | 24 | |
Cash (e) | | | — | | | 3 | | | — | | | 3 | |
Total U.S. Plans | | $ | — | | $ | 353 | | $ | — | | $ | 353 | |
Non-U.S. Plans: | | | | | | | | | | | | | |
Equity index: | | | | | | | | | | | | | |
U.S. (a) | | $ | — | | $ | 3 | | $ | — | | $ | 3 | |
Canada (f) | | | — | | | 13 | | | — | | | 13 | |
International (l) | | | — | | | 15 | | | — | | | 15 | |
Real estate (g) | | | — | | | 2 | | | — | | | 2 | |
Fixed income index: | | | | | | | | | | | | | |
Intermediate bond (h) | | | — | | | 34 | | | — | | | 34 | |
Long bond (k) | | | — | | | 99 | | | — | | | 99 | |
Other (j) | | | — | | | 24 | | | — | | | 24 | |
Cash (e) | | | 2 | | | 15 | | | — | | | 17 | |
Total Non-U.S. Plans | | $ | 2 | | $ | 205 | | $ | — | | $ | 207 | |
(a) | This category consists of both passively and actively managed equity index funds that track the return of large capitalization |
(b) | This category consists of both passively and actively managed equity index funds that track an index of returns on international developed market equities. |
(c) | This category consists of an actively managed fixed income index fund that invests in a diversified portfolio of fixed-income corporate securities with maturities generally exceeding 10 years. |
| (d) | This category consists of an actively managed fixed income index fund that invests in a diversified portfolio of fixed-income U.S. treasury securities with maturities generally exceeding 10 years. |
| (e) | This category represents cash or cash equivalents. |
| (f) | This category consists of an actively managed equity index fund that tracks against an index of large capitalization Canadian equities. |
| (g) | This category consists of an actively managed equity index fund that tracks against real estate investment trusts and real estate operating companies. |
| (h) | This category consists of both passively and actively managed fixed income index funds that track the return of intermediate duration government and investment grade corporate bonds. |
| (i) | This category consists of both passively and actively managed fixed income index funds that track the return of government bonds and investment grade corporate bonds. |
| (j) | This category mainly consists of investment products provided by insurance companies that offer returns that are subject to a minimum guarantee and mutual funds. |
| (k) | This category consists of both passively and actively managed fixed income index funds that track the return of government bonds, investment grade corporate bonds and hedge funds. |
| (l) | This category consists of both passively and actively managed equity index funds that track an index of returns on international developed market equities as well as infrastructure assets. |
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
All significant pension plan assets are held in collective trusts by the Company’s USU.S. and non-USnon-U.S. plans. The fair values of shares of collective trusts are based upon the net asset values of the funds reported by the fund managers based on quoted market prices of the underlying securities as of the balance sheet date and are considered to be Level 2 fair value measurements. This may produce a fair value measurement that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies could result in different fair value measurements at the reporting date.
In 2016,the year ended December 31, 2019, the Company made cash contributions of $10$1 million and $7 million to its USU.S. and non-USnon-U.S. pension plans, respectively. The Company anticipates that in 2017the year ending December 31, 2020 it will make cash contributions of $1 million and $2$3 million to its USU.S. and non-USnon-U.S. pension plans, respectively. Cash contributions in subsequent years will depend on a number of factors including the performance of plan assets.
83
The following benefit payments, which reflect anticipated future service, as appropriate, are expected to be made:
|
|
|
|
|
|
|
|
(in millions) |
| US Plans |
| Non-US Plans |
| ||
2017 |
| $ | 19 |
| $ | 9 |
|
2018 |
|
| 19 |
|
| 10 |
|
2019 |
|
| 20 |
|
| 10 |
|
2020 |
|
| 22 |
|
| 11 |
|
2021 |
|
| 23 |
|
| 11 |
|
Years 2022 - 2026 |
|
| 123 |
|
| 64 |
|
| | | | | | | |
(in millions) | | U.S. Plans | | Non-U.S. Plans |
| ||
2020 | | $ | 20 | | $ | 12 | |
2021 | | | 21 | | | 11 | |
2022 | | | 21 | | | 12 | |
2023 | | | 23 | | | 13 | |
2024 | | | 22 | | | 12 | |
Years 2025 - 2029 | | | 120 | | | 71 | |
The Company and certain subsidiaries also maintain defined contribution plans. The Company makes matching contributions to these plans that are subject to certain vesting requirements and are based on a percentage of employee contributions. Amounts charged to expense for defined contribution plans totaled $20 million, $17$21 million, and $17$22 million in 2016, 2015the years ended December 31, 2019, 2018, and 2014,2017, respectively.
Postretirement Benefit Plans --Plans: The Company’s postretirement benefit plans currently are not funded. The information presented below includes plans in the United States,U.S., Brazil, and Canada. The changes in the benefit obligations of the plans during 2016the years ended December 31, 2019 and 2015,2018, and the amounts recognized in the Company’s Consolidated Balance Sheets at December 31, 20162019, and 2015,2018, are as follows:
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
(in millions) |
| 2016 |
| 2015 |
|
| 2019 |
| 2018 |
| ||||
Accumulated postretirement benefit obligation |
|
|
|
|
|
|
| | | | | | | |
At January 1 |
| $ | 64 |
| $ | 47 |
| | $ | 64 | | $ | 70 | |
Service cost |
|
| 1 |
|
| 1 |
| | | 1 | | | 1 | |
Interest cost |
|
| 2 |
|
| 3 |
| | | 3 | | | 3 | |
Plan amendment |
|
| — |
|
| 1 |
| |||||||
Plan curtailments | | | — | | | (1) | | |||||||
Actuarial loss (gain) |
|
| 2 |
|
| (1) |
| | | 6 | | | (2) | |
Business combinations/ transfers |
|
| — |
|
| 21 |
| |||||||
Benefits paid |
|
| (4) |
|
| (3) |
| | | (5) | | | (4) | |
Foreign currency translation |
|
| 2 |
|
| (5) |
| | | — | | | (3) | |
At December 31 |
| $ | 67 |
| $ | 64 |
| | | 69 | | | 64 | |
Fair value of plan assets |
|
| — |
|
| — |
| | | — | | | — | |
Funded status |
| $ | (67) |
| $ | (64) |
| | $ | (69) | | $ | (64) | |
79
Amounts recognized in the Consolidated Balance SheetSheets consist of:
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
(in millions) |
| 2016 |
| 2015 |
| | 2019 | | 2018 |
| ||||
Current liabilities |
| $ | (4) |
| $ | (4) |
| | $ | (4) | | $ | (4) | |
Non-current liabilities |
|
| (63) |
|
| (60) |
| | | (65) | | | (60) | |
Net liability recognized |
| $ | (67) |
| $ | (64) |
| | $ | (69) | | $ | (64) | |
Amounts recognized in accumulated other comprehensive loss (income) loss,, excluding tax effects, that have not yet been recognized as components of net periodic benefit cost at December 31, 20162019 and 20152018, were as follows:
| | | | | | | |
(in millions) |
| 2019 |
| 2018 |
| ||
Net actuarial loss | | $ | 14 | | $ | 8 | |
Prior service credit | | | (2) | | | (4) | |
Net amount recognized | | $ | 12 | | $ | 4 | |
|
|
|
|
|
|
|
|
(in millions) |
| 2016 |
| 2015 |
| ||
Net actuarial loss |
| $ | 7 |
| $ | 7 |
|
Prior service credit |
|
| (8) |
|
| (11) |
|
Net amount recognized |
| $ | (1) |
| $ | (4) |
|
84
Components of net periodic benefit cost consisted of the following for the years ended December 31, 2016, 20152019, 2018, and 2014:2017:
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| | | | | | | | | ||||||||||||
| | Year Ended December 31, | ||||||||||||||||||
(in millions) |
|
| 2016 |
| 2015 |
| 2014 |
| | 2019 |
| 2018 |
| 2017 | ||||||
Service cost |
|
| $ | 1 |
| $ | 1 |
| $ | 3 |
| | $ | 1 | | $ | 1 | | $ | 1 |
Interest cost |
|
|
| 2 |
|
| 3 |
|
| 4 |
| | | 3 | | | 3 | | | 3 |
Amortization of prior service credit |
|
|
| (2) |
|
| (2) |
|
| — |
| | | (2) | | | (2) | | | (3) |
Net periodic benefit cost |
|
| $ | 1 |
| $ | 2 |
| $ | 7 |
| | $ | 2 | | $ | 2 | | $ | 1 |
The service cost component of net periodic benefit cost is presented within either cost of sales or operating expenses on the Consolidated Statements of Income. The interest cost and amortization of prior service credit components of net periodic benefit cost are presented as other, non-operating income on the Consolidated Statements of Income.
The Company estimates that postretirement benefit expense for these plans for 2017the year ending December 31, 2020 will include approximately $3$2 million relating to the amortization of the prior service credit as well as approximately $1 million relating to the amortization of its accumulated actuarial loss included in accumulated other comprehensive income atas of December 31, 2016.2019.
Total amounts recorded in other comprehensive income and net periodic benefit cost during 2016 was as follows:
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | |||||||
(in millions, pre-tax) |
| 2016 |
| 2015 |
|
| 2019 |
| 2018 | | 2017 | | |||||
Net actuarial loss (gain) |
| $ | 2 |
| $ | (2) |
| | $ | 6 | | $ | (3) | | $ | 2 | |
Amortization of prior service credit |
|
| 2 |
|
| 2 |
| | | 2 | | | 2 | | | 3 | |
New prior service cost |
|
| — |
|
| 2 |
| ||||||||||
Total recorded in other comprehensive income |
|
| 4 |
|
| 2 |
| | | 8 | | | (1) | | | 5 | |
Net periodic benefit cost |
|
| 1 |
|
| 2 |
| | | 2 | | | 2 | | | 1 | |
Total recorded in other comprehensive income and net periodic benefit cost |
| $ | 5 |
| $ | 4 |
| | $ | 10 | | $ | 1 | | $ | 6 | |
The following weighted average assumptions were used to determine the Company’s obligations under the postretirement plans:
|
|
|
|
|
|
|
| 2016 |
| 2015 |
|
Discount rate |
| 5.42 | % | 5.30 | % |
| | | | | |
| | 2019 | | 2018 | |
Discount rate | | 4.18 | % | 5.24 | % |
The following weighted average assumptions were used to determine the Company’s net postretirement benefit cost:
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| 2014 |
|
Discount rate |
| 5.30 | % | 5.70 | % | 6.47 | % |
| | | | | | | |
| | 2019 | | 2018 | | 2017 | |
Discount rate | | 5.49 | % | 4.93 | % | 5.46 | % |
The discount rate reflects a rate of return on high-quality fixed-income investments that match the duration of expected benefit payments. The Company has typically used returns on long-term, high-quality corporate AA bonds as a benchmark in establishing this assumption.
80
The healthcare cost trend rates used in valuing the Company’s postretirement benefit obligations are established based upon actual healthcare trends and consultation with actuaries and benefit providers. The following assumptions were used as of December 31, 2016:2019:
| | | | | | | |
| | U.S. | | Canada | | Brazil | |
2019 increase in per capita cost | | 6.00 | % | 5.83 | % | 7.38 | % |
Ultimate trend | | 4.50 | % | 4.00 | % | 7.38 | % |
Year ultimate trend reached | | 2037 | | 2040 | | 2019 | |
|
|
|
|
|
|
|
|
|
| US |
| Canada |
| Brazil |
|
2016 increase in per capita cost |
| 6.90 | % | 6.90 | % | 8.66 | % |
Ultimate trend |
| 4.50 | % | 4.50 | % | 8.66 | % |
Year ultimate trend reached |
| 2037 |
| 2031 |
| 2016 |
|
85
The sensitivities of service cost and interest cost and year-end benefit obligations to changes in healthcare cost trend rates for the postretirement benefit plans as of December 31, 20162019, are as follows:
| | | | |
(in millions) | |
| 2019 | |
One-percentage point increase in trend rates: | | | | |
- Increase in service cost and interest cost components | | $ |
| |
- Increase in year-end benefit obligations | |
|
| |
| | | | |
One-percentage point decrease in trend rates: | | | | |
- Decrease in service cost and interest cost components | |
|
| |
- Decrease in year-end benefit obligations | |
|
| |
The following benefit payments, which reflect anticipated future service, as appropriate, are expected to be made under the Company’s postretirement benefit plans:
|
|
|
|
|
(in millions) |
|
|
|
|
2017 |
| $ | 4 |
|
2018 |
|
| 4 |
|
2019 |
|
| 4 |
|
2020 |
|
| 4 |
|
2021 |
|
| 4 |
|
Years 2022 - 2026 |
| $ | 24 |
|
| | | | |
(in millions) | | | |
|
2020 | | $ | 4 | |
2021 | | | 4 | |
2022 | | | 4 | |
2023 | | | 4 | |
2024 | | | 4 | |
Years 2025 - 2029 | | | 21 | |
Multiemployer Plans --Multi-employer Plans: The Company participates in and contributes to one multiemployer1 multi-employer benefit plan under the terms of a collective bargaining agreementagreements that coverscover certain union-represented employees and retirees in the US.U.S. The plan covers medical and dental benefits for active hourly employees and retirees represented by the United StatesU.S. Steel Workers Union for certain USU.S. locations.
The risks of participating in this multiemployermulti-employer plan are different from single-employer plans. This plan receives contributions from two or more unrelated employers pursuant to one or more collective bargaining agreements and the assets contributed by one employer may be used to fund the benefits of all employees covered within the plan.
The Company is required to make contributions to this plan as determined by the terms and conditions of the collective bargaining agreements and plan terms. For the years ended December 31, 2016, 20152019, 2018, and 2014,2017, the Company made regular contributions of $14$13 million, $12 million, and $12$13 million, respectively, to this multi-employer plan. The Company cannot currently estimate the amount of multiemployermulti-employer plan contributions that will be required in 2017the year ending December 31, 2020 and future years, but these contributions could increase due to healthcare cost trends. The collective bargaining agreements associated with this plan expire during 2020 through 2024.
NOTE 11 – Supplementary InformationEquity
Balance Sheets
|
|
|
|
|
|
|
|
(in millions) |
| 2016 |
| 2015 |
| ||
Accounts receivable — net: |
|
|
|
|
|
|
|
Accounts receivable — trade |
| $ | 751 |
| $ | 672 |
|
Accounts receivable — other |
|
| 178 |
|
| 108 |
|
Allowance for doubtful accounts |
|
| (6) |
|
| (5) |
|
Total accounts receivable — net |
| $ | 923 |
| $ | 775 |
|
Inventories: |
|
|
|
|
|
|
|
Finished and in process |
| $ | 478 |
| $ | 438 |
|
Raw materials |
|
| 260 |
|
| 229 |
|
Manufacturing supplies |
|
| 51 |
|
| 48 |
|
Total inventories |
| $ | 789 |
| $ | 715 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
Compensation-related costs |
| $ | 107 |
| $ | 84 |
|
Income taxes payable |
|
| 40 |
|
| 46 |
|
Unrecognized tax benefits |
|
| 72 |
|
| 1 |
|
Dividends payable |
|
| 36 |
|
| 33 |
|
Accrued interest |
|
| 19 |
|
| 14 |
|
Taxes payable other than income taxes |
|
| 36 |
|
| 34 |
|
Other |
|
| 122 |
|
| 88 |
|
Total accrued liabilities |
| $ | 432 |
| $ | 300 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
Employees’ pension, indemnity and postretirement |
| $ | 109 |
| $ | 142 |
|
Other |
|
| 49 |
|
| 28 |
|
Total non-current liabilities |
| $ | 158 |
| $ | 170 |
|
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
| 2016 |
| 2015 |
| 2014 |
| |||
Other income - net: |
|
|
|
|
|
|
|
|
|
|
Gain from sale of plant |
| $ | — |
| $ | 10 |
| $ | — |
|
Legal settlement |
|
| — |
|
| (7) |
|
| — |
|
Income tax indemnification (expense) income (a) |
|
| — |
|
| (4) |
|
| 7 |
|
Gain from sale of investment |
|
| — |
|
| — |
|
| 5 |
|
Gain from sale of idled plant |
|
| — |
|
| — |
|
| 3 |
|
Other |
|
| 4 |
|
| 2 |
|
| 9 |
|
Other income - net |
| $ | 4 |
| $ | 1 |
| $ | 24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs-net: |
|
|
|
|
|
|
|
|
|
|
Interest expense, net of amounts capitalized (a) |
| $ | 73 |
| $ | 69 |
| $ | 73 |
|
Interest income |
|
| (10) |
|
| (14) |
|
| (13) |
|
Foreign currency transaction losses |
|
| 3 |
|
| 6 |
|
| 1 |
|
Financing costs-net |
| $ | 66 |
| $ | 61 |
| $ | 61 |
|
|
|
82
Statements of Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
| 2016 |
| 2015 |
| 2014 |
| |||
Other non-cash charges to net income: |
|
|
|
|
|
|
|
|
|
|
Mechanical stores expense (a) |
| $ | 57 |
| $ | 57 |
| $ | 56 |
|
Share-based compensation expense |
|
| 28 |
|
| 21 |
|
| 19 |
|
Other |
|
| 16 |
|
| 18 |
|
| (7) |
|
Total other non-cash charges to net income |
| $ | 101 |
| $ | 96 |
| $ | 68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
| 2016 |
| 2015 |
| 2014 |
| |||
Interest paid |
| $ | 59 |
| $ | 52 |
| $ | 59 |
|
Income taxes paid |
|
| 254 |
|
| 158 |
|
| 94 |
|
NOTE 12 – Equity
Preferred stock:
The Company has authorized 25 million shares of $0.01 par value preferred stock, noneNaN of which were issued or outstanding at December 31, 20162019 and 2015.2018.
Treasury stock:
On December 12, 2014,October 22, 2018, the Board of Directors authorized a new stock repurchase program permitting the Company to purchase up to 58 million of its outstanding shares of common sharesstock from January 1, 2015November 5, 2018 through December 12, 2019. The Company’s previously authorized stock repurchase program permitting the purchase of up to 4 million shares has been fully utilized.31, 2023. The parameters of the Company’s stock repurchase program are not established solely with reference to the dilutive impact of shares issued under the Company’s stock incentive plan. However, the Company expects that, over time, share repurchases will offset the dilutive impact of shares issued under the stock incentive plan.
On November 5, 2018, the Company entered into a Variable Timing Accelerated Share Repurchase (“ASR”) program with JPMorgan (“JPM”). Under the ASR program, the Company paid $455 million on November 5, 2018 and acquired 4 million shares of its common stock having an approximate value of $423 million on that date. On February 5, 2019, the Company and JPM settled the difference between the initial price and average daily volume-weighted average price (“VWAP”) less the agreed upon discount during the term of the agreement. The final VWAP was $98.04 per share, which was less than originally paid. The Company settled the difference in cash, resulting in JPM returning $63 million of the upfront payment to the Company on February 6, 2019, and lowering the total cost of repurchasing the 4 million
86
shares of common stock to $392 million. The Company adjusted Additional paid-in capital and Treasury stock by $32 million and $31 million, respectively, during the first quarter of 2019 for this inflow of cash.
In 2016,the year ended December 31, 2019, the Company had no share repurchasesdid not repurchase shares of common shares in open market transactions.stock. In 2015,the year ended December 31, 2018, the Company repurchased 435 thousand5.8 million shares of common sharesstock in open market transactions at a net cost of approximately $34$594 million.
As part of the previous stock repurchase program, the Company entered into an accelerated share repurchase agreement ("ASR") on July 30, 2014 with an investment bank under which the Company repurchased $300 million of its common stock. The Company paid the $300 million on August 1, 2014 and received an initial delivery of shares from the investment bank of 3,152,502 shares, representing approximately 80 percent of the shares anticipated to be repurchased based on current market prices at that time. The ASR was initially accounted for as an initial stock purchase transaction and a forward stock purchase contract. The initial delivery of shares resulted in an immediate reduction in the number of shares used to calculate the weighted average common shares outstanding for basic and diluted net earnings per share from the effective date of the ASR. On December 29, 2014, the ASR was completed and the Company received 671,823 additional shares of its common stock bringing the total amount of repurchases to 3,824,325 shares, based upon the volume-weighted average price of $78.45 per share over the term of the share repurchase agreement. The ASR was funded through a combination of cash on hand and utilization of the Company’s revolving credit agreement.
83
Set forth below is a reconciliation of common stock share activity for the years ended December 31, 2016, 20152019, 2018, and 2014:2017:
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
(Shares of common stock, in thousands) |
| Issued |
| Held in Treasury |
| Outstanding |
| | Issued | | Held in Treasury | | Outstanding |
|
Balance at December 31, 2013 |
| 77,673 |
| 3,361 |
| 74,312 |
| |||||||
Balance at December 31, 2016 | | 77,811 | | 5,397 | | 72,414 | | |||||||
Issuance of restricted stock units as compensation |
| 89 |
| (24) |
| 113 |
| | — | | (103) | | 103 | |
Performance shares and other share-based awards |
| 49 |
| (63) |
| 112 |
| | — | | (75) | | 75 | |
Stock options exercised |
| — |
| (618) |
| 618 |
| | — | | (443) | | 443 | |
Purchase/acquisition of common stock shares |
| — |
| 3,833 |
| (3,833) |
| |||||||
Balance at December 31, 2014 |
| 77,811 |
| 6,489 |
| 71,322 |
| |||||||
Purchase/acquisition of treasury stock | | — | | 1,039 | | (1,039) | | |||||||
Balance at December 31, 2017 | | 77,811 | | 5,815 | | 71,996 | | |||||||
Issuance of restricted stock units as compensation |
| — |
| (102) |
| 102 |
| | — | | (100) | | 100 | |
Performance shares and other share-based awards |
| — |
| (75) |
| 75 |
| | — | | (68) | | 68 | |
Stock options exercised |
| — |
| (556) |
| 556 |
| | — | | (209) | | 209 | |
Purchase/acquisition of common stock shares |
| — |
| 439 |
| (439) |
| |||||||
Balance at December 31, 2015 |
| 77,811 |
| 6,195 |
| 71,616 |
| |||||||
Purchase/acquisition of treasury stock | | — | | 5,847 | | (5,847) | | |||||||
Balance at December 31, 2018 | | 77,811 | | 11,285 | | 66,526 | | |||||||
Issuance of restricted stock units as compensation |
| — |
| (94) |
| 94 |
| | — | | (105) | | 105 | |
Performance shares and other share-based awards |
| — |
| (70) |
| 70 |
| | — | | (5) | | 5 | |
Stock options exercised |
| — |
| (636) |
| 636 |
| | — | | (182) | | 182 | |
Purchase/acquisition of common stock shares |
| — |
| 2 |
| (2) |
| |||||||
Balance at December 31, 2016 |
| 77,811 |
| 5,397 |
| 72,414 |
| |||||||
Purchase/acquisition of treasury stock | | — | | — | | — | | |||||||
Balance at December 31, 2019 | | 77,811 | | 10,993 | | 66,818 | | |||||||
Share-based payments:
The following table summarizes the components of the Company’s share-based compensation expense for the last three years:
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
| 2016 |
| 2015 |
| 2014 |
| |||
Stock options: |
|
|
|
|
|
|
|
|
|
|
Pre-tax compensation expense |
| $ | 9 |
| $ | 7 |
| $ | 7 |
|
Income tax (benefit) |
|
| (3) |
|
| (3) |
|
| (3) |
|
Stock option expense, net of income taxes |
|
| 6 |
|
| 4 |
|
| 4 |
|
|
|
|
|
|
|
|
|
|
|
|
RSUs: |
|
|
|
|
|
|
|
|
|
|
Pre-tax compensation expense |
|
| 12 |
|
| 9 |
|
| 8 |
|
Income tax (benefit) |
|
| (5) |
|
| (3) |
|
| (3) |
|
RSUs, net of income taxes |
|
| 7 |
|
| 6 |
|
| 5 |
|
|
|
|
|
|
|
|
|
|
|
|
Performance shares and other share-based awards: |
|
|
|
|
|
|
|
|
|
|
Pre-tax compensation expense |
|
| 7 |
|
| 5 |
|
| 4 |
|
Income tax (benefit) |
|
| (3) |
|
| (2) |
|
| (1) |
|
Performance shares and other share-based compensation expense, net of income taxes |
|
| 4 |
|
| 3 |
|
| 3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation: |
|
|
|
|
|
|
|
|
|
|
Pre-tax compensation expense |
|
| 28 |
|
| 21 |
|
| 19 |
|
Income tax (benefit) |
|
| (11) |
|
| (8) |
|
| (7) |
|
Total share-based compensation expense, net of income taxes |
| $ | 17 |
| $ | 13 |
| $ | 12 |
|
| | | | | | | | | | |
(in millions) |
| 2019 |
| 2018 |
| 2017 |
| |||
Stock options: | | | | | | | | | | |
Pre-tax compensation expense | | $ | 3 |
| $ | 5 |
| $ | 7 | |
Income tax benefit | |
| — | |
| (1) | |
| (2) | |
Stock option expense, net of income taxes | |
| 3 | |
| 4 | |
| 5 | |
| | | | | | | | | | |
Restricted stock units ("RSUs"): | | | | | | | | | | |
Pre-tax compensation expense | |
| 10 | |
| 12 | |
| 13 | |
Income tax benefit | |
| (2) | |
| (2) | |
| (4) | |
RSUs, net of income taxes | |
| 8 | |
| 10 | |
| 9 | |
| | | | | | | | | | |
Performance shares and other share-based awards: | | | | | | | | | | |
Pre-tax compensation expense | |
| 5 | |
| 4 | |
| 6 | |
Income tax benefit | |
| — | |
| — | |
| (2) | |
Performance shares and other share-based compensation expense, net of income taxes | |
| 5 | |
| 4 | |
| 4 | |
| | | | | | | | | | |
Total share-based compensation: | | | | | | | | | | |
Pre-tax compensation expense | |
| 18 | |
| 21 | |
| 26 | |
Income tax benefit | |
| (2) | |
| (3) | |
| (8) | |
Total share-based compensation expense, net of income taxes | | $ | 16 |
| $ | 18 |
| $ | 18 | |
The Company has a stock incentive plan (“SIP”) administered by the compensation committee of its Board of Directors that provides for the granting of stock options, restricted stock, restricted stock units, and other share-based awards to certain key employees. A maximum of 8 million shares were originally authorized for awards under the SIP. As
87
of December 31, 2016, 4.52019, 2.8 million shares were available for future grants under the SIP. Shares covered by awards that expire, terminate or lapse will again be available for the grant of awards under the SIP.
Stock Options:
The Company grants nonqualified Under the Company’s SIP, stock options to purchase sharesare granted at exercise prices that equal the market value of the Company’sunderlying common stock.stock on the date of grant. The stock options have a ten-year life10-year term and are exercisable upon vesting, which occurs evenly over a three-year period at the anniversary dates of the date of grant. Compensation expense is generally recognized on a straight-line basis for all awards over the
84
employee’s vesting period or over a one-year required service period for certain retirement eligible executive level employees. The Company estimates a forfeiture rate at the time of grant and updates the estimate throughout the vesting of the stock options within the amount of compensation costs recognized in each period. As of
The Company granted non-qualified options to purchase 247 thousand shares and 215 thousand shares for the years ended December 31, 2016, certain of these nonqualified options have been forfeited due to the termination of employees.
2019, and 2018, respectively. The fair value of stockeach option awardsgrant was estimated at the grant dates using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
| |||||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||||||||
| | | | | | | | | | |||||||
| | For the Year Ended December 31, | ||||||||||||||
| | 2019 | | 2018 | | 2017 | ||||||||||
Expected life (in years) |
| 5.5 |
| 5.5 |
| 5.5 |
| | 5.5 | | | 5.5 | | | 5.5 | |
Risk-free interest rate |
| 1.4 | % | 1.4 | % | 1.6 | % | | 2.5 | % | | 2.5 | % | | 1.9 | % |
Expected volatility |
| 23.4 | % | 25.2 | % | 30.3 | % | | 19.7 | % | | 19.8 | % | | 22.5 | % |
Expected dividend yield |
| 1.8 | % | 2.0 | % | 2.8 | % | | 2.7 | % | | 1.8 | % | | 1.7 | % |
The expected life of options represents the weighted-averageweighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free interest rate is based on the USU.S. Treasury yield curve in effect at the time ofgrant date for the grant for periodsperiod corresponding withto the expected life of the options. Expected volatility is based on historical volatilities of the Company’s common stock. Dividend yields are based on historicalcurrent dividend payments. The weighted average fair value of options granted during 2016, 2015 and 2014 was estimated to be $18.73, $16.04 and $12.99, respectively.
A summary of stock option transactions for the year follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
| |
|
|
|
| Average |
| Average |
| Aggregate |
| ||
|
|
|
| Exercise |
| Remaining |
| Intrinsic |
| ||
(dollars and options in thousands, |
| Number of |
| Price per |
| Contractual |
| Value |
| ||
except per share amounts) |
| Options |
| Share |
| Term (Years) |
| (in millions) |
| ||
Outstanding at December 31, 2015 |
| 2,651 |
| $ | 52.93 |
| 5.96 |
| $ | 114 |
|
Granted |
| 329 |
|
| 99.96 |
|
|
|
|
|
|
Exercised |
| (638) |
|
| 45.90 |
|
|
|
|
|
|
Cancelled |
| (61) |
|
| 63.96 |
|
|
|
|
|
|
Outstanding at December 31, 2016 |
| 2,281 |
| $ | 61.39 |
| 5.93 |
| $ | 145 |
|
Exercisable at December 31, 2016 |
| 1,547 |
| $ | 50.80 |
| 5.70 |
|
| 115 |
|
| | | | | | | | | | | |
|
| Number of Options (in thousands) |
| Weighted Average Exercise Price per Share |
| Average Remaining Contractual Term (Years) |
| Aggregate Intrinsic Value (in millions) |
| ||
Outstanding as of December 31, 2018 |
| 2,079 |
| $ | 80.25 | | 5.51 | | $ | 42 | |
Granted |
| 247 | | | 91.85 | | | | | | |
Exercised |
| (182) | | | 35.40 | | | | | | |
Cancelled |
| (89) | | | 108.94 | | | | | | |
Outstanding as of December 31, 2019 |
| 2,055 | | $ | 84.36 |
| 5.30 |
| $ | 34 | |
Exercisable as of December 31, 2019 |
| 1,626 | | $ | 77.97 |
| 4.48 |
| $ | 33 | |
The intrinsic values of stock options exercised during 2016, 2015 and 2014 were approximately $46 million, $27 million and $26 million, respectively. For the years ended December 31, 2016, 20152019, 2018 and 2014,2017, cash received from the exercise of stock options was $29$6 million, $21$10 million, and $20 million, respectively. The excess income tax benefit realized from share-based compensation was $12 million, $8 million and $6 million in 2016, 2015 and 2014, respectively. As of December 31, 2016,2019, the unrecognized compensation cost related to non-vested stock options totaled $4$2 million, which is expected to be amortized over the weighted-average period of approximately 1.31.5 years.
Additional information pertaining to stock option activity is as follows:
| | | | | | | | | |
| | | | | | ||||
| | Year Ended December 31, | |||||||
(dollars in millions, except per share) |
| 2019 |
| 2018 | | 2017 | |||
Weighted average grant date fair value of stock options granted (per share) | | $ | 14.02 | | $ | 24.01 | | $ | 23.90 |
Total intrinsic value of stock options exercised | | | 10 | | | 15 | | | 35 |
Restricted Stock Units:
In addition to stock options, the The Company awards shares ofhas granted restricted stock units (“RSUs”) to certain key employees. The RSUs issued under the plan are subject to cliff vesting, generally after three years provided the employee remains in the service of the Company. Compensation expense is generally recognized on a straight-line basis for all awards over the employee’s vesting period or over a one-year required service period for certain retirement eligible executive level employees. The Company estimates a forfeiture rate at the time of grant and updates the estimate throughout the vesting of the RSUs within the
88
amount of compensation costs recognized in each period. The fair value of the RSUs is determined based upon the number of shares granted and the quoted market price of the Company’s common stock at the date of the grant.
The following table summarizes RSU activity for the year:
|
|
|
|
|
|
| |||||
|
|
|
| Weighted |
| ||||||
|
| Number of |
| Average |
| ||||||
|
| Restricted |
| Fair Value |
| ||||||
| | | | | | ||||||
| | | | Weighted | |||||||
| | Number of | | Average | |||||||
| | Restricted | | Fair Value | |||||||
(shares in thousands) |
| Shares |
| per Share |
| | Shares | | per Share | ||
Non-vested at December 31, 2015 |
| 439 |
| $ | 69.96 |
| |||||
Non-vested at December 31, 2018 | | 344 | | $ | 115.06 | ||||||
Granted |
| 152 |
|
| 101.21 |
| | 178 | | | 91.11 |
Vested |
| (134) |
|
| 65.83 |
| | (137) | | | 101.54 |
Cancelled |
| (28) |
|
| 79.66 |
| | (46) | | | 114.51 |
Non-vested at December 31, 2016 |
| 429 |
| $ | 81.04 |
| |||||
Non-vested at December 31, 2019 | | 339 | | $ | 108.02 | ||||||
85
The total fair value of RSUs that vested in 2016, 2015the years ended December 31, 2019, 2018, and 20142017 was $16 million, $15 million, $13 million and $11$18 million, respectively.
At December 31, 2016,2019, the total remaining unrecognized compensation cost related to RSUs was $14 million which will be amortized on a weighted-average basis over approximately 1.71.8 years. Recognized compensation cost related to unvested RSUs is included in share-basedShare-based payments subject to redemption in the Consolidated Balance Sheets and totaled $21$23 million and $17$26 million at December 31, 20162019 and 2015,2018, respectively.
Performance Shares:
The Company has a long-term incentive plan for senior management in the form of performance shares. The ultimate payments forHistorically these performance shares awarded and eventually paid will bevested based solely on the Company’s total shareholder return on the Company’s stock as compared to the total shareholder return of its peer group over the three-year vesting period. Beginning with the performance share grants in the year ended December 31, 2019, the vesting of the performance shares will be based on 2 performance metrics. NaN percent of the performance shares awarded will vest based on the stockCompany’s total shareholder return as compared to the total shareholder return of aits peer group, and the remaining 50 percent will vest based on the calculation of the Company’s three-year average Return on Invested Capital (“ROIC”) against an established ROIC target.
For the performance shares awarded in the first quarter of 2019, based on the Company’s total shareholder return, the number of shares that ultimately vest can range from 0 to 200 percent of the awarded grant depending on the Company’s total shareholder return as compared to the total shareholder return of its peer group. The final paymentsshare award vesting will be calculated at the end of the three yearthree-year period and areis subject to approval by management and the Compensation Committee.Committee of the Board of Directors. Compensation expense is based on the fair value of the performance shares at the grant date, established using a Monte Carlo simulation model. The total compensation expense for these awards is amortized over a three-year graded vesting schedule.
For the year ended December 31, 2016, the Company awarded 44 thousand performance shares at a weighted average fair valueawarded in the first quarter of $131.34. The Company awarded 47 thousand, 58 thousand, and 45 thousand performance shares in 2015, 2014 and 2013, respectively. The2019, based on ROIC, the number of shares that ultimately vest can range from zero0 to 200 percent of the awarded grant depending on the Company’s stockROIC performance as compared toagainst the stock performancetarget. The share award vesting will be calculated at the end of the peer group.three-year period and is subject to approval by management and the Compensation Committee. Compensation expense is based on the market price of the Company’s common stock on the date of the grant and the final number of shares that ultimately vest. The Company will estimate the potential share vesting at least annually to adjust the compensation expense for these awards over the vesting period to reflect the Company’s estimated ROIC performance versus the target. The total compensation expense for these awards is amortized over a three-year graded vesting schedule.
The Company awarded 70 thousand, 27 thousand, and 38 thousand performance shares in the years ended December 31, 2019, 2018 and 2017, respectively. The weighted average fair value of the shares granted during 2015, 2014the years ended December 31, 2019, 2018 and 20132017 was $77.54, $52.03$92.57, $141.91, and $67.19,$114.08, respectively.
The 2013 performance share award granted in the year ended December 31, 2016 vested in February 2016,the first quarter of 2019, achieving a 2000 percent pay outpayout of the grant, or 90 thousand total vestedgranted performance shares. As of December 31, 2016,2019, the performance awards granted in 2014 and 2015the year ended December 31, 2017 are estimated to pay out at 200 percent. The 2016 granted performance award is estimated to pay out at 160 percent.0 percent, respectively. There were no share cancellations3 thousand shares cancelled during the year ended December 31, 2016. 2019.
89
As of December 31, 2016,2019, the unrecognized compensation cost relating to these plans was $3$4 million, which will be amortized over the remaining requisite service periods of 1.8 years. Recognized compensation cost related to these unvested awards is included in share-based payments subject to redemption in the Consolidated Balance Sheets and totaled $9 million and $7$10 million at December 31, 20162019 and 2015,2018, respectively.
Other share-based awards under the SIP:
Under the compensation agreement with the Board of Directors, $110,000$120,000 of a non-employee director’s annual retainer and 50 percent of the additional retainers paid to the Lead Director and the Chairmen of committees of the Board of Directors are awarded in shares of common stock or, restricted units based on each director’s electionsif a director elects to receivedefer all or a portion of his or her common stock or cash compensation, or a portion thereof in the formshares of restricted stock units. These restricted units vest immediately, but cannot be transferred until a date not less than six months after the director’s termination of service from the boardBoard of Directors at which time the restricted units will be settled by delivering shares of common stock.stock with fractional shares to be paid in cash. The compensation expense relating to this plan included in the Consolidated Statements of Income was approximately $1 million in 2016, 2015the years ended December 31, 2019, 2018, and 2014.2017. At December 31, 2016,2019, there were approximately 175,000210 thousand restricted stock units outstanding under this plan at a carrying value of approximately $9$13 million.
86
Accumulated Other Comprehensive Loss:
A summary of accumulated other comprehensive income (loss) for the years ended December 31, 2014, 20152017, 2018, and 20162019, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred |
|
|
|
| Unrealized |
| Accumulated |
| |||
|
| Cumulative |
| Gain/(Loss) |
| Pension/ |
| Gain (Loss) |
| Other |
| |||||
|
| Translation |
| on Hedging |
| Postretirement |
| on |
| Comprehensive |
| |||||
(in millions) |
| Adjustment |
| Activities |
| Adjustment |
| Investments |
| Loss |
| |||||
Balance, December 31, 2013 |
| $ | (489) |
| $ | (40) |
| $ | (53) |
| $ | (1) |
| $ | (583) |
|
Losses on cash-flow hedges, net of income tax effect of $12 |
|
|
|
|
| (29) |
|
|
|
|
|
|
|
| (29) |
|
Amount of losses on cash-flow hedges reclassified to earnings, net of income tax effect of $23 |
|
|
|
|
| 50 |
|
|
|
|
|
|
|
| 50 |
|
Actuarial losses on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $5 |
|
|
|
|
|
|
|
| (12) |
|
|
|
|
| (12) |
|
Losses related to pension and other postretirement obligations reclassified to earnings, net of income tax effect of $1 |
|
|
|
|
|
|
|
| 4 |
|
|
|
|
| 4 |
|
Currency translation adjustment |
|
| (212) |
|
|
|
|
|
|
|
|
|
|
| (212) |
|
Balance, December 31, 2014 |
| $ | (701) |
| $ | (19) |
| $ | (61) |
| $ | (1) |
| $ | (782) |
|
Losses on cash-flow hedges, net of income tax effect of $19 |
|
|
|
|
| (42) |
|
|
|
|
|
|
|
| (42) |
|
Amount of losses on cash-flow hedges reclassified to earnings, net of income tax effect of $14 |
|
|
|
|
| 32 |
|
|
|
|
|
|
|
| 32 |
|
Actuarial gains on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $5 |
|
|
|
|
|
|
|
| 13 |
|
|
|
|
| 13 |
|
Losses related to pension and other postretirement obligations reclassified to earnings, net of income tax effect |
|
|
|
|
|
|
|
| 1 |
|
|
|
|
| 1 |
|
Currency translation adjustment |
|
| (324) |
|
|
|
|
|
|
|
|
|
|
| (324) |
|
Balance, December 31, 2015 |
| $ | (1,025) |
| $ | (29) |
| $ | (47) |
| $ | (1) |
| $ | (1,102) |
|
Losses on cash-flow hedges, net of income tax effect of $6 |
|
|
|
|
| (11) |
|
|
|
|
|
|
|
| (11) |
|
Amount of losses on cash-flow hedges reclassified to earnings, net of income tax effect of $16 |
|
|
|
|
| 33 |
|
|
|
|
|
|
|
| 33 |
|
Actuarial losses on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $4 |
|
|
|
|
|
|
|
| (10) |
|
|
|
|
| (10) |
|
Losses related to pension and other postretirement obligations reclassified to earnings, net of income tax effect |
|
|
|
|
|
|
|
| 1 |
|
|
|
|
| 1 |
|
Unrealized gain on investments, net of income tax effect |
|
|
|
|
|
|
|
|
|
|
| 1 |
|
| 1 |
|
Currency translation adjustment |
|
| 17 |
|
|
|
|
|
|
|
|
|
|
| 17 |
|
Balance, December 31, 2016 |
| $ | (1,008) |
| $ | (7) |
| $ | (56) |
| $ | — |
| $ | (1,071) |
|
| | | | | | | | | | | | | | | | |
(in millions) |
| Cumulative Translation Adjustment |
| Deferred (Loss) Gain on Hedging Activities |
| Pension and Postretirement Adjustment |
| Unrealized (Loss) Gain on Investment |
| Accumulated Other Comprehensive Loss |
| |||||
Balance, December 31, 2016 | | $ | (1,008) | | $ | (7) | | $ | (56) | | $ | — | | $ | (1,071) | |
Other comprehensive income (loss) before reclassification adjustments | | | 57 | | | (16) | | | 8 | | | 3 | | | 52 | |
Amount reclassified from accumulated OCI | | | — | | | 6 | | | (2) | | | — | | | 4 | |
Tax benefit (provision) | | | — | | | 4 | | | (1) | | | (1) | | | 2 | |
Net other comprehensive income (loss) | | | 57 | | | (6) | | | 5 | | | 2 | | | 58 | |
Balance, December 31, 2017 | | | (951) | | | (13) | | | (51) | | | 2 | | | (1,013) | |
Other comprehensive (loss) income before reclassification adjustments | | | (129) | | | 8 | | | (20) | | | — | | | (141) | |
Amount reclassified from accumulated OCI | | | — | | | 6 | | | — | | | — | | | 6 | |
Tax (provision) benefit | | | — | | | (4) | | | 5 | | | — | | | 1 | |
Net other comprehensive (loss) income | | | (129) | | | 10 | | | (15) | | | — | | | (134) | |
Adoption of ASU 2016-01 | | | — | | | — | | | — | | | (2) | | | (2) | |
Adoption of ASU 2018-02 | | | — | | | (2) | | | (3) | | | — | | | (5) | |
Other | | | — | | | (2) | | | (3) | | | (2) | | | (7) | |
Balance, December 31, 2018 | | | (1,080) | | | (5) | | | (69) | | | — | | | (1,154) | |
Other comprehensive loss before reclassification adjustments | | | (9) | | | (19) | | | 11 | | | — | | | (17) | |
Amount reclassified from accumulated OCI | | | — | | | 14 | | | — | | | — | | | 14 | |
Tax benefit (provision) | | | — | | | 1 | | | (2) | | | — | | | (1) | |
Net other comprehensive loss | | | (9) | | | (4) | | | 9 | | | — | | | (4) | |
Balance, December 31, 2019 | | $ | (1,089) | | $ | (9) | | $ | (60) | | $ | — | | $ | (1,158) | |
87
90
The following table provides detail pertaining to reclassifications from AOCI into net income for the periods presented:
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| Affected Line Item in |
|
Details about AOCI Components |
| Amount Reclassified from AOCI |
| Consolidated Statements |
| |||||||
(in millions) |
| 2016 |
| 2015 |
| 2014 |
| of Income |
| |||
Losses on cash-flow hedges: |
|
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|
|
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|
|
|
Commodity and foreign currency contracts |
| $ | (47) |
| $ | (43) |
| $ | (70) |
| Gross profit |
|
Interest rate contracts |
|
| (2) |
|
| (3) |
|
| (3) |
| Financing costs, net |
|
Losses related to pension and other postretirement obligations |
|
| (1) |
|
| (1) |
|
| (5) |
| (a) |
|
Total before-tax reclassifications |
| $ | (50) |
| $ | (47) |
| $ | (78) |
|
|
|
Income tax benefit |
|
| 16 |
|
| 14 |
|
| 24 |
|
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Total after-tax reclassifications |
| $ | (34) |
| $ | (33) |
| $ | (54) |
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Supplemental Information: The following table provides the computation of basic and diluted earnings per common share (“EPS”) for the periods presented.
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| 2016 |
| 2015 |
| 2014 |
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| Net Income |
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| Net Income |
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| Net Income |
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| ||||||||||||||||||||||||||||||||||
|
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| Available |
| Weighted |
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| Available |
| Weighted |
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| Available |
| Weighted |
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| ||||||||||||||||||||||||||||||||||
|
|
| to Ingredion |
| Average Shares |
| Per Share |
| to Ingredion |
| Average Shares |
| Per Share |
| to Ingredion |
| Average Shares |
| Per Share |
| ||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
| | | 2019 | | | 2018 | | | 2017 | | ||||||||||||||||||||||||||||||||||||||||||||
| | | Net Income | | | Weighted | | | Per | | | Net Income | | | Weighted | | | Per | | | Net Income | | | Weighted | | | Per | | ||||||||||||||||||||||||||
| | | Available | | | Average | | | Share | | | Available | | | Average | | | Share | | | Available | | | Average | | | Share | | ||||||||||||||||||||||||||
(in millions, except per share amounts) |
|
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
|
| | to Ingredion | |
| Shares |
| | Amount | |
| to Ingredion | |
| Shares |
| | Amount |
| | to Ingredion | |
| Shares | |
| Amount | | ||||||
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Basic EPS |
|
| $ | 484.9 |
| 72.3 |
| $ | 6.70 |
| $ | 402.2 |
| 71.6 |
| $ | 5.62 |
| $ | 354.9 |
| 73.6 |
| $ | 4.82 |
| | $ | 413 | |
| 66.9 | | $ | 6.17 | | $ | 443 | |
| 70.9 | | $ | 6.25 | | $ | 519 | |
| 72.0 | | $ | 7.21 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Effect of Dilutive Securities: |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||
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Incremental shares from assumed exercise of dilutive stock options and vesting of dilutive RSUs and other awards |
|
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| 1.8 |
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| 1.4 |
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| 1.3 |
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| | | | |
| 0.5 | | | | | | | |
| 0.9 | | | | | | | |
| 1.5 | | | | | |||
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Diluted EPS |
|
| $ | 484.9 |
| 74.1 |
| $ | 6.55 |
| $ | 402.2 |
| 73.0 |
| $ | 5.51 |
| $ | 354.9 |
| 74.9 |
| $ | 4.74 |
| | $ | 413 | |
| 67.4 | | $ | 6.13 | | $ | 443 | |
| 71.8 | | $ | 6.17 | | $ | 519 | |
| 73.5 | | $ | 7.06 | |
Approximately 1.1 million, 0.5 million, and 0.3 million share-based awards of common stock were excluded in the years ended December 31, 2019, 2018, and 2017, respectively, from the calculation of the weighted average number of shares outstanding for diluted EPS because their effects were anti-dilutive.
NOTE 12 – Segment Information
The Company is principally engaged in the production and sale of starches and sweeteners for a wide range of industries, and is managed geographically on a regional basis. The Company’s operations are classified into 4 reportable business segments: North America, South America, Asia-Pacific, and EMEA. Its North America segment includes businesses in the U.S., Mexico, and Canada. The Company’s South America segment includes businesses in Brazil, Colombia, Ecuador, and the Southern Cone of South America, which includes Argentina, Peru, Chile, and Uruguay. Its Asia-Pacific segment includes businesses in South Korea, Thailand, China, Australia, Japan, Indonesia, Singapore, the Philippines, India, Malaysia, New Zealand, and Vietnam. The Company’s EMEA segment includes businesses in Pakistan, Germany, the United Kingdom, South Africa, and Kenya. Net sales by product are not presented because to do so would be impracticable.
| | | | | | | | | | |
(in millions) |
| 2019 |
| 2018 |
| 2017 | | |||
Net sales to unaffiliated customers: | | | | | | | | | | |
North America | | $ | 3,834 | | $ | 3,857 | | $ | 3,843 | |
South America | | | 960 | | | 988 | | | 1,052 | |
Asia-Pacific | | | 823 | | | 837 | | | 772 | |
EMEA | | | 592 | | | 607 | | | 577 | |
Total | | $ | 6,209 | | $ | 6,289 | | $ | 6,244 | |
91
| | | | | | | | | | |
(in millions) | | | 2019 | |
| 2018 |
| 2017 | ||
Operating income: | | | | | | | | | | |
North America | | $ | 522 | | $ | 545 | | $ | 654 | |
South America | | | 96 | | | 99 | | | 81 | |
Asia-Pacific | | | 87 | | | 104 | | | 115 | |
EMEA | | | 99 | | | 116 | | | 114 | |
Corporate | | | (99) | | | (97) | | | (86) | |
Subtotal | | | 705 | | | 767 | | | 878 | |
Restructuring/impairment charges (a) | | | (57) | | | (64) | | | (38) | |
Acquisition/integration costs | | | (3) | | | — | | | (4) | |
Brazil tax matter (b) | | | 22 | | | — | | | — | |
Charge for fair value markup of acquired inventory | | | — | | | — | | | (9) | |
Insurance settlement | | | — | | | — | | | 9 | |
Other | | | (3) | | | — | | | — | |
Total operating income | | $ | 664 | | $ | 703 | | $ | 836 | |
88
| (a) | The year ended December 31, 2019 includes $57 million of restructuring expenses, including $29 million of net restructuring related expenses as part of the Cost Smart Cost of sales program and $28 million of employee-related and other costs, including professional services, associated with the Cost Smart SG&A program. The year ended December 31, 2018 includes $49 million of restructuring expenses as part of the Cost Smart Cost of sales program in relation to the cessation of wet-milling at the Stockton, California plant, $11 million of restructuring costs related to Cost Smart SG&A program, $3 million of costs related to the North America finance transformation program, and $1 million of costs related to the leaf extraction process in Brazil. The year ended December 31, 2017 includes $17 million of employee-related severance and other costs associated with the restructuring in Argentina, $13 million of restructuring of related to the leaf extraction process in Brazil, $6 million of employee-related severance and other costs associated with the Finance Transformation initiative, and $2 million of other restructuring charges including employee-related severance costs in North America and a refinement of estimates for prior year restructuring activities. |
| (b) | During the year ended December 31, 2019, the Company recorded a $22 million pre-tax benefit for the favorable judgement received by Ingredion from the Federal Court of Appeals in Brazil related to certain indirect taxes collected in prior years. As a result of the decision, the Company expects to be entitled to credits against its Brazilian federal tax payments in 2020 and future years. The benefit recorded represents the Company's current estimate of the credits and interest due from the favorable decision in accordance with ASC 450, Contingencies. This benefit was offset by other adjusted charges during the period. |
| | | | | | | |
| | As of December 31, | | ||||
(in millions) | | 2019 |
| 2018 | | ||
Total assets: | | | | | | | |
North America (a) | | $ | 3,924 | | $ | 3,737 | |
South America | | | 774 | | | 711 | |
Asia-Pacific | | | 843 | | | 792 | |
EMEA | | | 499 | | | 488 | |
Total | | $ | 6,040 | | $ | 5,728 | |
| (a) | For purposes of presentation, North America includes Corporate assets. |
92
| | | | | | | | | |
(in millions) | | 2019 |
| 2018 |
| 2017 | |||
Depreciation and amortization: | | | | | | | | | |
North America (a) | | $ | 146 | | $ | 180 | | $ | 140 |
South America | | | 22 | | | 24 | | | 27 |
Asia-Pacific | | | 37 | | | 27 | | | 25 |
EMEA | | | 15 | | | 16 | | | 17 |
Total | | $ | 220 | | $ | 247 | | $ | 209 |
Mechanical stores expense (b): | | | | | | | | | |
North America (a) | | $ | 40 | | $ | 38 | | $ | 37 |
South America | | | 10 | | | 11 | | | 12 |
Asia-Pacific | | | 4 | ��� | | 5 | | | 5 |
EMEA | | | 3 | | | 3 | | | 3 |
Total | | $ | 57 | | $ | 57 | | $ | 57 |
Capital expenditures and mechanical stores purchases: | | | | | | | | | |
North America (a) | | $ | 226 | | $ | 232 | | $ | 180 |
South America | | | 45 | | | 61 | | | 50 |
Asia-Pacific | | | 40 | | | 39 | | | 51 |
EMEA | | | 17 | | | 18 | | | 33 |
Total | | $ | 328 | | $ | 350 | | $ | 314 |
| (a) | For purposes of presentation, North America includes Corporate activities of depreciation, amortization, capital expenditures, and mechanical stores purchase, respectively. |
| (b) | Represents spare parts used in the production process. Such spare parts are recorded in PP&E as part of machinery and equipment until they are utilized in the manufacturing process and expensed as a period cost. |
The following table presents net sales to unaffiliated customers by country of origin for the last three years:
| | | | | | | | | | |
| | Net Sales | | |||||||
(in millions) | | 2019 | | 2018 | | 2017 |
| |||
U.S. | | $ | 2,368 | | $ | 2,386 | | $ | 2,423 | |
Mexico | | | 1,075 | | | 1,067 | | | 1,011 | |
Brazil | | | 479 | | | 478 | | | 534 | |
Canada | | | 390 | | | 404 | | | 408 | |
Korea | | | 270 | | | 296 | | | 285 | |
Others | | | 1,627 | | | 1,658 | | | 1,583 | |
Total | | $ | 6,209 | | $ | 6,289 | | $ | 6,244 | |
The following table presents long-lived assets (excluding intangible assets and deferred income taxes) by country as of December 31:
| | | | | | |
| | Long-lived Assets | ||||
(in millions) |
| 2019 |
| 2018 | ||
U.S. | | $ | 1,239 | | $ | 1,004 |
Mexico | | | 343 | | | 318 |
Brazil | | | 205 | | | 207 |
Canada | | | 187 | | | 165 |
Thailand | | | 156 | | | 137 |
Germany | | | 129 | | | 129 |
Korea | | | 110 | | | 110 |
Others | | | 260 | | | 259 |
Total | | $ | 2,629 | | $ | 2,329 |
NOTE 13 – Segment Information
The Company is principally engaged in the production and sale of starches and sweeteners for a wide range of industries, and is managed geographically on a regional basis. The Company’s operations are classified into four reportable business segments: North America, South America, Asia Pacific and Europe, Middle East and Africa (“EMEA”). Its North America segment includes businesses in the United States, Canada and Mexico. The Company’s South America segment includes businesses in Brazil, Colombia, Ecuador and the Southern Cone of South America, which includes Argentina, Chile, Peru and Uruguay. Its Asia Pacific segment includes businesses in South Korea, Thailand, Malaysia, China, Japan, Indonesia, the Philippines, Singapore, India, Australia and New Zealand. The Company’s EMEA segment includes businesses in the United Kingdom, Germany, South Africa, Pakistan and Kenya.
|
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| |||
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|
|
|
|
(in millions) |
| 2016 |
| 2015 |
| 2014 |
| |||
Net sales to unaffiliated customers: |
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 3,447 |
| $ | 3,345 |
| $ | 3,093 |
|
South America |
|
| 1,010 |
|
| 1,013 |
|
| 1,203 |
|
Asia Pacific |
|
| 709 |
|
| 733 |
|
| 794 |
|
EMEA |
|
| 538 |
|
| 530 |
|
| 578 |
|
Total |
| $ | 5,704 |
| $ | 5,621 |
| $ | 5,668 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 610 |
| $ | 479 |
| $ | 375 |
|
South America |
|
| 89 |
|
| 101 |
|
| 108 |
|
Asia Pacific |
|
| 111 |
|
| 107 |
|
| 103 |
|
EMEA (a) |
|
| 106 |
|
| 93 |
|
| 95 |
|
Corporate (b) |
|
| (86) |
|
| (75) |
|
| (65) |
|
Subtotal |
|
| 830 |
|
| 705 |
|
| 616 |
|
Restructuring / impairment charges (c) |
|
| (19) |
|
| (28) |
|
| (33) |
|
Acquisition / integration costs |
|
| (3) |
|
| (10) |
|
| (2) |
|
Charge for fair value markup of acquired inventory |
|
| — |
|
| (10) |
|
| — |
|
Litigation settlement |
|
| — |
|
| (7) |
|
| — |
|
Gain from sale of Canadian plant |
|
| — |
|
| 10 |
|
| — |
|
Total |
| $ | 808 |
| $ | 660 |
| $ | 581 |
|
Total assets: |
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 3,796 |
| $ | 3,163 |
| $ | 2,901 |
|
South America |
|
| 809 |
|
| 714 |
|
| 923 |
|
Asia Pacific |
|
| 697 |
|
| 716 |
|
| 711 |
|
EMEA |
|
| 480 |
|
| 481 |
|
| 550 |
|
Total |
| $ | 5,782 |
| $ | 5,074 |
| $ | 5,085 |
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 130 |
| $ | 123 |
| $ | 111 |
|
South America |
|
| 26 |
|
| 30 |
|
| 38 |
|
Asia Pacific |
|
| 23 |
|
| 23 |
|
| 26 |
|
EMEA |
|
| 17 |
|
| 18 |
|
| 20 |
|
Total |
| $ | 196 |
| $ | 194 |
| $ | 195 |
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 167 |
| $ | 158 |
| $ | 130 |
|
South America |
|
| 56 |
|
| 61 |
|
| 90 |
|
Asia Pacific |
|
| 41 |
|
| 36 |
|
| 30 |
|
EMEA |
|
| 20 |
|
| 25 |
|
| 26 |
|
Total |
| $ | 284 |
| $ | 280 |
| $ | 276 |
|
|
|
|
|
89
|
|
|
The following table presents net sales to unaffiliated customers by country of origin for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales |
| |||||||
(in millions) |
| 2016 |
| 2015 |
| 2014 |
| |||
United States |
| $ | 2,117 |
| $ | 1,983 |
| $ | 1,681 |
|
Mexico |
|
| 955 |
|
| 945 |
|
| 955 |
|
Brazil |
|
| 522 |
|
| 452 |
|
| 591 |
|
Canada |
|
| 375 |
|
| 417 |
|
| 457 |
|
Korea |
|
| 266 |
|
| 276 |
|
| 295 |
|
Argentina |
|
| 201 |
|
| 252 |
|
| 262 |
|
Others |
|
| 1,268 |
|
| 1,296 |
|
| 1,427 |
|
Total |
| $ | 5,704 |
| $ | 5,621 |
| $ | 5,668 |
|
The following table presents long-lived assets (excluding intangible assets and deferred income taxes) by country at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
| Long-lived Assets |
| |||||||
(in millions) |
| 2016 |
| 2015 |
| 2014 |
| |||
United States |
| $ | 955 |
| $ | 920 |
| $ | 803 |
|
Mexico |
|
| 303 |
|
| 292 |
|
| 296 |
|
Brazil |
|
| 245 |
|
| 196 |
|
| 294 |
|
Canada |
|
| 147 |
|
| 126 |
|
| 154 |
|
Germany |
|
| 106 |
|
| 114 |
|
| 133 |
|
Thailand |
|
| 119 |
|
| 111 |
|
| 105 |
|
Korea |
|
| 84 |
|
| 83 |
|
| 88 |
|
Argentina |
|
| 60 |
|
| 64 |
|
| 82 |
|
Others |
|
| 218 |
|
| 200 |
|
| 214 |
|
Total |
| $ | 2,237 |
| $ | 2,106 |
| $ | 2,169 |
|
NOTE 14 – Commitments and Contingencies
In January 2019, the Company’s Brazilian subsidiary received a favorable decision from the Federal Court of Appeals in Sao Paulo, Brazil, related to certain indirect taxes collected in prior years. As a result of the decision, the Company expects to be entitled to indirect tax credits against its Brazilian federal tax payments in 2020 and future years. The Company finalized its calculation of the amount of the credits and interest due from the favorable decision, concluding
93
that the Company could be entitled to approximately $86 million of credits spanning a period from 2005 to 2018. The Department of Federal Revenue of Brazil, however, issued an Internal Ruling in which it charged that the Company is entitled to only $22 million of the calculated indirect tax credits and interest for the period from 2005 to 2014. The Brazil National Treasury has filed a partymotion for clarification with the Brazilian Supreme Court, asking the Court, among other things, to a large numbermodify the lower court’s decision to approve the Internal Ruling, which could impact the decision in favor of labor claims relatingthe Company. Due to our Brazilian operations.the uncertainty arising from the issuance of the Internal Ruling, the Company recorded $22 million of credits in 2019 in accordance with ASC 450, Contingencies. The $22 million of future tax credits, which was recorded in the Consolidated Income Statement in Other income, resulted in additional deferred income taxes of $8 million. The income taxes will be paid as and when the tax credits are utilized. The Company has reserved an aggregatecontinues to monitor the pending decisions within the Brazilian courts that may result in changes to the calculations and the timing of approximately $5 million asthe recording of December 31, 2016 in respectany additional gains and receipt of these claims. These labor claims primarily relate to dismissals, severance, health and safety, work schedules and salary adjustments.the benefits.
The Company is currently subject to various other claims and suits arising in the ordinary course of business, including labor matters, certain environmental proceedings, and other commercial claims. The Company also routinely receivesreceive inquiries from regulators and other government authorities relating to various aspects of its business, including with respect to compliance with laws and regulations relating to the environment, and at any given time, the Company has matters at various stages of resolution with the applicable governmental authorities. The outcomes of these matters are not within the Company’s complete control and may not be known for prolonged periods of time. The Company does not believe that the results of currently known legal proceedings and inquires even if unfavorable to the Company, will be material to the Company.it. There can be no assurance, however, that such claims, suits or investigations or those arising in the future, whether taken individually or in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations.
NOTE 14 – Supplementary Information
Consolidated Balance Sheets
| | | | | | | |
(in millions) |
| 2019 |
| 2018 |
| ||
Accounts receivable, net: | | | | | | | |
Accounts receivable — trade | | $ | 830 | | $ | 802 | |
Accounts receivable — other | | | 157 | | | 157 | |
Allowance for doubtful accounts | | | (10) | | | (8) | |
Total accounts receivable, net | | $ | 977 | | $ | 951 | |
Inventories: | | | | | | | |
Finished and in process | | $ | 565 | | $ | 522 | |
Raw materials | | | 237 | | | 250 | |
Manufacturing supplies | | | 59 | | | 52 | |
Total inventories | | $ | 861 | | $ | 824 | |
Accrued liabilities: | | | | | | | |
Compensation-related costs | | $ | 93 | | $ | 81 | |
Income taxes payable | | | 16 | | | 27 | |
Current lease liabilities | | | 41 | | | — | |
Dividends payable | | | 42 | | | 42 | |
Accrued interest | | | 15 | | | 15 | |
Taxes payable other than income taxes | | | 36 | | | 33 | |
Other | | | 138 | | | 127 | |
Total accrued liabilities | | $ | 381 | | $ | 325 | |
Non-current liabilities: | | | | | | | |
Employees’ pension, indemnity, and postretirement | | | 132 | | | 122 | |
Other | | | 88 | | | 95 | |
Total non-current liabilities | | $ | 220 | | $ | 217 | |
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Consolidated Statements of Income
| | | | | | | | | | |
(in millions) |
| 2019 |
| 2018 |
| 2017 |
| |||
Other income, net: | | | | | | | | | | |
Brazil tax matter | | $ | 22 | | $ | — | | $ | — | |
Insurance settlement | | | — | | | — | | | 9 | |
Value-added tax recovery | | | — | | | 5 | | | 6 | |
Other | | | (3) | | | 5 | | | 3 | |
Other income, net | | $ | 19 | | $ | 10 | | $ | 18 | |
| | | | | | | | | |
(in millions) | | 2019 | | 2018 | | 2017 | |||
Financing costs, net: | | | | | | | | | |
Interest expense, net of amounts capitalized (a) | | $ | 84 | | $ | 81 | | $ | 79 |
Interest income | | | (7) | | | (9) | | | (11) |
Foreign currency transaction losses | | | 4 | | | 14 | | | 5 |
Financing costs, net | | $ | 81 | | $ | 86 | | $ | 73 |
| (a) | Interest capitalized amounted to $5 million, $3 million, and $4 million in the years ended December 31, 2019, 2018, and 2017, respectively. |
Consolidated Statements of Cash Flow
| | | | | | | | | | |
(in millions) | | 2019 | | 2018 | | 2017 |
| |||
Other non-cash charges to net income: | | | | | | | | | | |
Share-based compensation expense | | $ | 18 | | $ | 21 | | $ | 26 | |
Other | |
| 15 | |
| 18 | |
| 13 | |
Total other non-cash charges to net income | | $ | 33 | | $ | 39 | | $ | 39 | |
| | | | | | | | | | |
(in millions) |
| 2019 |
| 2018 |
| 2017 |
| |||
Interest paid | | $ | 80 | | $ | 73 | | $ | 77 | |
Income taxes paid | | | 145 | | | 231 | | | 289 | |
Quarterly Financial Data (Unaudited)
Summarized quarterly financial data is as follows:
| | | | | | | | | | | | | |
(in millions, except per share amounts) |
| 1st QTR (a) |
| 2nd QTR (b) |
| 3rd QTR (c) |
| 4th QTR (d) |
| ||||
2019 | | | | | | | | | | | | | |
Net sales | | $ | 1,536 | | $ | 1,550 | | $ | 1,574 | | $ | 1,549 | |
Gross profit | | | 316 | | | 329 | | | 344 | | | 323 | |
Net income attributable to Ingredion | | | 100 | | | 105 | | | 99 | | | 109 | |
Basic earnings per common share of Ingredion | | | 1.50 | | | 1.57 | | | 1.48 | | | 1.63 | |
Diluted earnings per common share of Ingredion | | | 1.48 | | | 1.56 | | | 1.47 | | | 1.61 | |
Per share dividends declared | | $ | 0.625 | | $ | 0.625 | | $ | 0.63 | | $ | 0.63 | |
| | | | | | | | | | | | | |
(in millions, except per share amounts) |
| 1st QTR (e) |
| 2nd QTR (f) |
| 3rd QTR (g) |
| 4th QTR (h) |
| ||||
2018 | | | | | | | | | | | | | |
Net sales | | $ | 1,581 | | $ | 1,608 | | $ | 1,563 | | $ | 1,537 | |
Gross profit | | | 354 | | | 360 | | | 334 | | | 320 | |
Net income attributable to Ingredion | | | 140 | | | 114 | | | 95 | | | 94 | |
Basic earnings per common share of Ingredion | | | 1.94 | | | 1.59 | | | 1.33 | | | 1.38 | |
Diluted earnings per common share of Ingredion | | | 1.90 | | | 1.57 | | | 1.32 | | | 1.36 | |
Per share dividends declared | | $ | 0.60 | | $ | 0.60 | | $ | 0.625 | | $ | 0.625 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts) |
| 1st QTR |
| 2nd QTR |
| 3rd QTR |
| 4th QTR* |
| ||||
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales before shipping and handling costs |
| $ | 1,434 |
| $ | 1,533 |
| $ | 1,569 |
| $ | 1,484 |
|
Less: shipping and handling costs |
|
| 74 |
|
| 78 |
|
| 80 |
|
| 85 |
|
Net sales |
| $ | 1,360 |
| $ | 1,455 |
| $ | 1,489 |
| $ | 1,399 |
|
Gross profit |
|
| 339 |
|
| 355 |
|
| 369 |
|
| 339 |
|
Net income attributable to Ingredion |
|
| 130 |
|
| 117 |
|
| 143 |
|
| 94 |
|
Basic earnings per common share of Ingredion |
| $ | 1.81 |
| $ | 1.62 |
| $ | 1.98 |
| $ | 1.29 |
|
Diluted earnings per common share of Ingredion |
| $ | 1.77 |
| $ | 1.58 |
| $ | 1.93 |
| $ | 1.26 |
|
| (a) | In the first quarter of 2019, the Company recorded $3 million in after-tax, net restructuring costs and $1 million in after-tax, net acquisition/integration costs. |
| (b) | In the second quarter of 2019, the Company recorded $7 million in after-tax, net restructuring costs. |
| (c) | In the third quarter of 2019, the Company recorded $22 million in after-tax, net restructuring cost and $2 million in after-tax charges for other tax matters. |
| (d) | In the fourth quarter of 2019, the Company recorded $13 million in after-tax, other income related to other matters, $12 million in after-tax, net restructuring costs, and $1 million in after-tax, acquisition/integration costs. |
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| (e) | In the first quarter of 2018, the Company recorded $3 million in after-tax, net restructuring costs. |
| (f) | In the second quarter of 2018, the Company recorded $5 million in after-tax, net restructuring costs and $2 million in after-tax,interest penalty related to an income tax settlement. |
| (g) | In the third quarter of 2018, the Company recorded $27 million in after-tax, net restructuring costs, $2 million in after-tax charges for the refinement of provisional charges related to the enactment of the TCJA, and $2 million after-tax gain related to a refinement of reserve for an income tax settlement. |
| (h) | In the fourth quarter of 2018, the Company recorded $16 million in after-tax, net restructuring costs and $1 million in after-tax charges for the refinement of provisional charges related to the enactment of the TCJA. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts) |
| 1st QTR |
| 2nd QTR |
| 3rd QTR |
| 4th QTR* |
| ||||
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales before shipping and handling costs |
| $ | 1,410 |
| $ | 1,536 |
| $ | 1,524 |
| $ | 1,489 |
|
Less: shipping and handling costs |
|
| 80 |
|
| 87 |
|
| 87 |
|
| 84 |
|
Net sales |
| $ | 1,330 |
| $ | 1,449 |
| $ | 1,437 |
| $ | 1,405 |
|
Gross profit |
|
| 281 |
|
| 319 |
|
| 330 |
|
| 313 |
|
Net income attributable to Ingredion |
|
| 84 |
|
| 107 |
|
| 108 |
|
| 104 |
|
Basic earnings per common share of Ingredion |
| $ | 1.17 |
| $ | 1.49 |
| $ | 1.51 |
| $ | 1.45 |
|
Diluted earnings per common share of Ingredion |
| $ | 1.15 |
| $ | 1.47 |
| $ | 1.48 |
| $ | 1.42 |
|
* Fourth quarter 2016 includes a charge of $27 million ($0.36 per diluted common share) associated with an income tax settlement, acquisition and integration costs of $1.4 million ($0.9 million after-tax, or $0.01 per diluted common share) and restructuring costs of $4.0 million ($2.5 million after-tax, or $0.03 per diluted common share) consisting of employee severance-related costs in North America and employee severance-related and other costs associated with the execution of global IT outsourcing contracts. Fourth quarter 2015 includes a charge of $3.8 million ($2.6 million after-tax, or $0.04 per diluted common share) for restructuring costs in Canada, the United States and Brazil, costs of $0.7 million ($0.6 million after-tax, or $0.01 per diluted common share) associated with the acquisition and integration of Penford and Kerr, costs of $1.8 million ($1.1 million after-tax, or $0.02 per diluted common share) relating to the sale of Kerr inventory that was adjusted to fair value at the acquisition date in accordance with business combination accounting rules, costs of $6.8 million ($4.3 million after-tax, or $0.06 per diluted common share) relating to a litigation settlement and a gain of $9.8 million ($8.9 million after-tax, or $0.12 per diluted common share) from the sale of our Port Colborne, Canada plant.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and our Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2016.2019. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and procedures (a) are effective in providing reasonable assurance that all material information required to be filed in this report has been recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
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In the fourth quarter of 2016, we acquired Shandong Huanong Specialty Corn Development Co., Ltd. in Pingyuan County, Shandong Province, China (“Shandong”) and TIC Gums Incorporated (“TIC Gums”). In conducting our evaluation of the effectiveness of internal control over financial reporting, we have elected to exclude Shandong and TIC Gums from our evaluation as of December 31, 2016, as permitted by the Securities and Exchange Commission. We are currently in the process of evaluating and integrating the acquired operations, processes and internal controls. See Note 3 of the Notes to the Consolidated Financial Statements for additional information regarding the acquisitions. There have been no other changes in our internal control over financial reporting during the quarter ended December 31, 20162019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. This system of internal controls is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management’s authorization.
Internal control over financial reporting includes those policies and procedures that:
1. | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets. |
2. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with accounting principles generally accepted in the |
3. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework of Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The scope of the assessment included all of the subsidiaries of the Company except for Shandong and TIC Gums, which were acquired in the fourth quarter of 2016. The consolidated net sales of the Company for the year ended December 31, 2016 were $5.70 billion of which Shandong represented $0.3 million. Our results did not include any sales for TIC Gums as that entity was acquired on December 29, 2016. The consolidated total assets of the Company at December 31, 2016 were $5.78 billion of which Shandong and TIC Gums represented $435 million.Company. Based on the evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2016.2019. The effectiveness of our internal control over financial reporting has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report included herein.in the Consolidated Financial Statements filed with this report.
None.
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PART III
ITEM 10. DIRECTORS,DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information contained under the headings “Proposal 1. Election of Directors,” “The Board and Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance” inInformation required by this Item 10 is incorporated herein by reference to the Company’s definitive proxy statement for the Company’s 20172020 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference., including the information in the Proxy Statement appearing under the headings “Proposal 1. Election of Directors” and “The Board and Committees.” The information regarding executive officers called forrequired by Item 401 of Regulation S-K is included in Part 1 of this report under the heading “Executive Officers of the Registrant.“Information about our Executive Officers.”
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, and controller. The code of ethics is posted on the Company’s Internet website, which is found at www.ingredion.com. The Company intends to includedisclose on its website, within any period that may be required under SEC rules, any amendments to, or waivers from,under, a provision of its code of ethics that applies to the Company’s principal executive officer, principal financial officer or controller that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
TheInformation required by this Item 11 is incorporated herein by reference to the Proxy Statement, including the information containedin the Proxy Statement appearing under the headings “Executive Compensation,” “Compensation Committee Report,” “Director Compensation” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement is incorporated herein by reference.Participation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
TheInformation required by this Item 12 is incorporated herein by reference to the Proxy Statement, including the information containedin the Proxy Statement appearing under the headings “Equity Compensation Plan Information as of December 31, 2016”2019” and “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
TheInformation required by this Item 13 is incorporated herein by reference to the Proxy Statement, including the information containedin the Proxy Statement appearing under the headings “Review and Approval of Transactions with Related Persons,” “Certain Relationships and Related Transactions” and “Independence of Board Members”Members.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item 14 is incorporated herein by reference to the Proxy Statement, including the information in the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information containedappearing under the heading “2016“2019 and 20152018 Audit Firm Fee Summary” in the Proxy Statement is incorporated herein by reference.Summary.”
9397
PART IV
ITEM 15. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
Item 15(a)(1) Consolidated Financial Statements
Financial Statements (see the Index to the Consolidated Financial Statements on page 5251 of this report).
Item 15(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted because the information either is not required or is otherwise included in the consolidated financial statements and notes thereto.
Item 15(a)(3) Exhibits
The following list of exhibits includes both exhibits submitted with this Form 10-K as filed with the SEC and those incorporated by reference from other filings.
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101.SCH | Inline XBRL Taxonomy Extension Schema Document. | ||
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* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 15(b) of this report.
ITEM 16. FORM 10-K SUMMARY
None.
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101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 22nd day of February, 2017.authorized.
| | | |
| INGREDION INCORPORATED | ||
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Date: February 19, 2020 | By: | /s/ | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this Reportreport has been signed below by the following persons on behalf of the Registrant,registrant, in the capacities indicated and on the 22nd day of February, 2017.dates indicated.
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Signature | | Title | | Date | |||||||
| |
| | | |||||||
| | | | | |||||||
/s/ | |
| |||||||||
| February 19, 2020 | ||||||||||
James P. Zallie | | (Principal executive officer) | | | |||||||
| | | | | |||||||
/s/ | | Chief Financial Officer | |||||||||
| February 19, 2020 | ||||||||||
James D. Gray | | (Principal financial officer) | | | |||||||
| | | | | |||||||
/s/ Stephen K. Latreille | | Controller | | February 19, 2020 | |||||||
Stephen K. Latreille | | (Principal accounting officer) | | | |||||||
| | | | | |||||||
*Luis Aranguren-Trellez | | Director | | February 19, 2020 | |||||||
Luis Aranguren-Trellez | | | | | |||||||
| | | | | |||||||
*David B. Fischer | | Director | | February 19, 2020 | |||||||
David B. Fischer | | | | ||||||||
| | | | | |||||||
*Paul Hanrahan | | Director | | February 19, 2020 | |||||||
Paul Hanrahan | | | | ||||||||
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*Rhonda L. Jordan | | Director | | February 19, 2020 | |||||||
Rhonda L. Jordan | | | | ||||||||
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*Gregory B. Kenny | | Director | | February 19, 2020 | |||||||
Gregory B. Kenny | | | | ||||||||
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*Barbara A. Klein | | Director | | February 19, 2020 | |||||||
Barbara A. Klein | | | | ||||||||
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*Victoria J. Reich | | Director | | February 19, 2020 | |||||||
Victoria J. Reich | | | | ||||||||
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*Stephan B. Tanda | | Director | | February 19, 2020 | |||||||
Stephan B. Tanda | | | | | |||||||
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* Jorge A. Uribe | | Director | | February 19, 2020 | |||||||
Jorge A. Uribe | | | | ||||||||
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*Dwayne A. Wilson | | Director | | February 19, 2020 | |||||||
Dwayne A. Wilson | | | | ||||||||
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*By: | /s/ | | |
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| | |
| Attorney-in-fact | | |
| Date: February 19, 2020 | | |
(Being the principal executive officer, the principal financial officer, the controller and a majority of the directors of Ingredion Incorporated)
99102