UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20172018
or
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☐ | 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 name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
22-3514823
(I.R.S. Employer Identification Number)
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5 WESTBROOK CORPORATE CENTER WESTCHESTER, ILLINOIS |
| 60154 |
(Address of principal executive offices) |
| (Zip Code) |
(708) 551-2600
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☒ |
| Accelerated filer ☐ |
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Non-accelerated filer ☐ |
| Smaller reporting company ☐ |
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| 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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
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CLASS |
| OUTSTANDING AT |
Common Stock, $.01 par value |
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PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Ingredion Incorporated (“Ingredion”)
Condensed Consolidated Statements of Income
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
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| Three Months Ended |
| Six Months Ended |
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| September 30, |
| September 30, |
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| June 30, |
| June 30, |
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(in millions, except per share amounts) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
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Net sales before shipping and handling costs |
| $ | 1,574 |
| $ | 1,569 |
| $ | 4,653 |
| $ | 4,537 |
|
| $ | 1,608 |
| $ | 1,558 |
| $ | 3,189 |
| $ | 3,110 |
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Less: shipping and handling costs |
|
| 89 |
|
| 80 |
|
| 258 |
|
| 233 |
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|
| 112 |
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| 101 |
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| 224 |
|
| 200 |
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Net sales |
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| 1,485 |
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| 1,489 |
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| 4,395 |
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| 4,304 |
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| 1,496 |
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| 1,457 |
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| 2,965 |
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| 2,910 |
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Cost of sales |
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| 1,097 |
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| 1,120 |
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| 3,282 |
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| 3,241 |
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| 1,136 |
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| 1,084 |
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| 2,251 |
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| 2,186 |
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Gross profit |
|
| 388 |
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| 369 |
|
| 1,113 |
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| 1,063 |
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|
| 360 |
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| 373 |
|
| 714 |
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| 724 |
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Operating expenses |
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| 152 |
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| 149 |
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| 458 |
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| 431 |
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|
| 161 |
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| 158 |
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| 317 |
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| 308 |
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Other income, net |
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| (4) |
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| (3) |
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| (7) |
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| (2) |
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| (2) |
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| (1) |
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| (4) |
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| (3) |
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Restructuring/impairment charges |
|
| 7 |
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| 2 |
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| 23 |
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| 15 |
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| 8 |
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| 6 |
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| 11 |
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| 16 |
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Operating income |
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| 233 |
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| 221 |
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| 639 |
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| 619 |
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|
| 193 |
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| 210 |
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| 390 |
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| 403 |
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Financing costs, net |
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| 16 |
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| 15 |
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| 57 |
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| 48 |
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| 25 |
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| 20 |
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| 41 |
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| 41 |
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Other, non-operating income |
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| (1) |
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| (1) |
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| (2) |
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| (3) |
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Income before income taxes |
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| 217 |
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| 206 |
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| 582 |
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| 571 |
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| 169 |
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| 191 |
|
| 351 |
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| 365 |
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Provision for income taxes |
|
| 48 |
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| 60 |
|
| 153 |
|
| 172 |
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|
| 53 |
|
| 58 |
|
| 92 |
|
| 105 |
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Net income |
|
| 169 |
|
| 146 |
|
| 429 |
|
| 399 |
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|
| 116 |
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| 133 |
|
| 259 |
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| 260 |
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Less: Net income attributable to non-controlling interests |
|
| 3 |
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| 3 |
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| 9 |
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| 8 |
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| 2 |
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| 3 |
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| 5 |
|
| 6 |
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Net income attributable to Ingredion |
| $ | 166 |
| $ | 143 |
| $ | 420 |
| $ | 391 |
|
| $ | 114 |
| $ | 130 |
| $ | 254 |
| $ | 254 |
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Weighted average common shares outstanding: |
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Basic |
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| 71.9 |
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| 72.5 |
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| 72.0 |
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| 72.2 |
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| 71.9 |
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| 71.8 |
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| 72.1 |
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| 72.0 |
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Diluted |
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| 73.3 |
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| 74.3 |
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| 73.4 |
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| 74.0 |
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| 72.8 |
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| 73.2 |
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| 73.2 |
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| 73.4 |
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Earnings per common share of Ingredion: |
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Basic |
| $ | 2.31 |
| $ | 1.98 |
| $ | 5.83 |
| $ | 5.42 |
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| $ | 1.59 |
| $ | 1.81 |
| $ | 3.52 |
| $ | 3.53 |
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Diluted |
| $ | 2.26 |
| $ | 1.93 |
| $ | 5.72 |
| $ | 5.29 |
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| $ | 1.57 |
| $ | 1.78 |
| $ | 3.47 |
| $ | 3.46 |
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See Notes to Condensed Consolidated Financial Statements
2
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Ingredion Incorporated (“Ingredion”)
Condensed Consolidated Statements of Comprehensive (Loss) Income (Loss)
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
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| September 30, |
| September 30, |
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(in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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Net income |
| $ | 169 |
| $ | 146 |
| $ | 429 |
| $ | 399 |
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Other comprehensive income: |
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Losses on cash-flow hedges, net of income tax effect of $6, $9, $2, and $9, respectively |
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| (10) |
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| (18) |
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| (2) |
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| (15) |
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Losses on cash-flow hedges reclassified to earnings, net of income tax effect of $1, $2, $- and $9, respectively |
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| — |
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| 4 |
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| 1 |
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| 18 |
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Actuarial gains (losses) on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $-, $-, $- and $1, respectively |
|
| — |
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| — |
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| 1 |
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| (4) |
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(Gains) losses related to pension and other postretirement obligations reclassified to earnings, net of income tax effect |
|
| — |
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| — |
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| (1) |
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| 1 |
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Unrealized gains on investments, net of income tax effect |
|
| — |
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| — |
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| 1 |
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| — |
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Currency translation adjustment |
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| 30 |
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| 9 |
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| 62 |
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| 68 |
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Comprehensive income |
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| 189 |
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| 141 |
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| 491 |
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| 467 |
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Less: Comprehensive income attributable to non-controlling interests |
|
| 3 |
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| 3 |
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| 9 |
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| 8 |
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Comprehensive income attributable to Ingredion |
| $ | 186 |
| $ | 138 |
| $ | 482 |
| $ | 459 |
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| Three Months Ended |
| Six Months Ended |
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| June 30, |
| June 30, |
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(in millions) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
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Net income |
| $ | 116 |
| $ | 133 |
| $ | 259 |
| $ | 260 |
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Other comprehensive (loss) income: |
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(Losses) gains on cash flow hedges, net of income tax effect of $5, $1, $ — and $4, respectively |
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| (16) |
|
| 3 |
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| 1 |
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| 8 |
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(Gains) losses on cash flow hedges reclassified to earnings, net of income tax effect of $ —, $ —, $1 and $1, respectively |
|
| (1) |
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| (2) |
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| 2 |
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| 1 |
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Actuarial gains (losses) on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $ — |
|
| — |
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| 1 |
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| (1) |
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| 1 |
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Gains related to pension and other postretirement obligations reclassified to earnings, net of income tax effect of $ — |
|
| — |
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| (1) |
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| — |
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| (1) |
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Unrealized gains on investments, net of income tax effect of $ — |
|
| — |
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| 1 |
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| 1 |
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| 1 |
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Currency translation adjustment |
|
| (117) |
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| (8) |
|
| (96) |
|
| 32 |
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Comprehensive (loss) income |
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| (18) |
|
| 127 |
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| 166 |
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| 302 |
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Less: Comprehensive income attributable to non-controlling interests |
|
| — |
|
| 3 |
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| 1 |
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| 6 |
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Comprehensive (loss) income attributable to Ingredion |
| $ | (18) |
| $ | 124 |
| $ | 165 |
| $ | 296 |
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See Notes to Condensed Consolidated Financial Statements
3
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Ingredion Incorporated (“Ingredion”)
Condensed Consolidated Balance Sheets
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| September 30, |
| December 31, |
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| June 30, |
| December 31, |
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(in millions, except share and per share amounts) |
| 2017 |
| 2016 |
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| 2018 |
| 2017 |
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| (Unaudited) |
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| (Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 491 |
| $ | 512 |
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| $ | 359 |
| $ | 595 |
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Short-term investments |
|
| 14 |
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| 4 |
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| 6 |
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| 9 |
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Accounts receivable, net |
|
| 901 |
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| 923 |
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| 909 |
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| 961 |
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Inventories |
|
| 825 |
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| 789 |
|
|
| 866 |
|
| 823 |
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Prepaid expenses |
|
| 35 |
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| 24 |
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| 30 |
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| 27 |
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Total current assets |
|
| 2,266 |
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| 2,252 |
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|
| 2,170 |
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| 2,415 |
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Property, plant and equipment, net of accumulated depreciation of $2,980 and $2,826, respectively |
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| 2,186 |
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| 2,116 |
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Property, plant and equipment, net of accumulated depreciation of $3,003 and $2,991, respectively |
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| 2,161 |
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| 2,217 |
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Goodwill |
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| 803 |
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| 784 |
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| 794 |
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| 803 |
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Other intangible assets, net of accumulated amortization of $130 and $106, respectively |
|
| 499 |
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| 502 |
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Other intangible assets, net of accumulated amortization of $153 and $139, respectively |
|
| 476 |
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| 493 |
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Deferred income tax assets |
|
| 7 |
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| 7 |
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| 10 |
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| 9 |
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Other assets |
|
| 132 |
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| 121 |
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|
| 137 |
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| 143 |
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Total assets |
| $ | 5,893 |
| $ | 5,782 |
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| $ | 5,748 |
| $ | 6,080 |
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Liabilities and equity |
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Current liabilities: |
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Short-term borrowings |
| $ | 153 |
| $ | 106 |
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| $ | 133 |
| $ | 120 |
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Accounts payable and accrued liabilities |
|
| 787 |
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| 872 |
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| 749 |
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| 837 |
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Total current liabilities |
|
| 940 |
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| 978 |
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| 882 |
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| 957 |
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Non-current liabilities |
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| 180 |
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| 158 |
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| 247 |
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| 227 |
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Long-term debt |
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| 1,731 |
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| 1,850 |
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| 1,530 |
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| 1,744 |
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Deferred income tax liabilities |
|
| 154 |
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| 171 |
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| 202 |
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| 199 |
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Share-based payments subject to redemption |
|
| 30 |
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| 30 |
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| 31 |
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| 36 |
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Ingredion stockholders’ equity: |
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Preferred stock — authorized 25,000,000 shares — $0.01 par value, none issued |
|
| — |
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| — |
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| — |
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| — |
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Common stock — authorized 200,000,000 shares — $0.01 par value, 77,810,875 issued at September 30, 2017 and December 31, 2016, respectively |
|
| 1 |
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| 1 |
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Common stock — authorized 200,000,000 shares — $0.01 par value, 77,810,875 issued at June 30, 2018 and December 31, 2017, respectively |
|
| 1 |
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| 1 |
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Additional paid-in capital |
|
| 1,140 |
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| 1,149 |
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| 1,128 |
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| 1,138 |
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Less: Treasury stock (common stock: 5,964,226 and 5,396,526 shares at September 30, 2017 and December 31, 2016, respectively) at cost |
|
| (504) |
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| (413) |
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Less: Treasury stock (common stock: 6,791,995 and 5,815,904 shares at June 30, 2018 and December 31, 2017, respectively) at cost |
|
| (615) |
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| (494) |
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Accumulated other comprehensive loss |
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| (1,009) |
|
| (1,071) |
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|
| (1,106) |
|
| (1,013) |
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Retained earnings |
|
| 3,203 |
|
| 2,899 |
|
|
| 3,426 |
|
| 3,259 |
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Total Ingredion stockholders’ equity |
|
| 2,831 |
|
| 2,565 |
|
|
| 2,834 |
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| 2,891 |
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Non-controlling interests |
|
| 27 |
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| 30 |
|
|
| 22 |
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| 26 |
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Total equity |
|
| 2,858 |
|
| 2,595 |
|
|
| 2,856 |
|
| 2,917 |
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Total liabilities and equity |
| $ | 5,893 |
| $ | 5,782 |
|
| $ | 5,748 |
| $ | 6,080 |
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See Notes to Condensed Consolidated Financial Statements
4
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Ingredion Incorporated (“Ingredion”)
Condensed Consolidated Statements of Equity and Redeemable Equity
(Unaudited)
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| Total Equity |
| Share-based |
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| Additional |
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| Accumulated Other |
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| Non- |
| Payments |
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| Common |
| Paid-In |
| Treasury |
| Comprehensive |
| Retained |
| Controlling |
| Subject to |
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(in millions) |
| Stock |
| Capital |
| Stock |
| Loss |
| Earnings |
| Interests |
| Redemption |
| |||||||
Balance, December 31, 2017 |
| $ | 1 |
| $ | 1,138 |
| $ | (494) |
| $ | (1,013) |
| $ | 3,259 |
| $ | 26 |
| $ | 36 |
|
Net income attributable to Ingredion |
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| 254 |
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Net income attributable to non-controlling interests |
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| 5 |
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Dividends declared |
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| (88) |
|
| (4) |
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Repurchases of common stock |
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| (141) |
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Share-based compensation, net of issuance |
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| (6) |
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| 20 |
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| (5) |
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Other comprehensive loss |
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| (93) |
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| (4) |
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Other |
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| (4) |
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|
|
| 1 |
|
| (1) |
|
|
|
|
Balance, June 30, 2018 |
| $ | 1 |
| $ | 1,128 |
| $ | (615) |
| $ | (1,106) |
| $ | 3,426 |
| $ | 22 |
| $ | 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Equity |
| Share-based |
| |||||||||||||||||
|
|
|
|
| Additional |
|
|
|
| Accumulated Other |
|
|
|
| Non- |
| Payments |
| ||||
|
| Common |
| Paid-In |
| Treasury |
| Comprehensive |
| Retained |
| Controlling |
| Subject to |
| |||||||
(in millions) |
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 420 |
|
|
|
|
|
|
|
Net income attributable to non-controlling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9 |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (116) |
|
| (12) |
|
|
|
|
Repurchases of common stock |
|
|
|
|
|
|
|
| (123) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation, net of issuance |
|
|
|
|
| (9) |
|
| 32 |
|
|
|
|
|
|
|
|
|
|
| — |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 62 |
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017 |
| $ | 1 |
| $ | 1,140 |
| $ | (504) |
| $ | (1,009) |
| $ | 3,203 |
| $ | 27 |
| $ | 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Equity |
| Share-based |
|
| Total Equity |
| Share-based |
| ||||||||||||||||||||||||||||||||||
|
|
|
|
| Additional |
|
|
|
| Accumulated Other |
|
|
|
| Non- |
| Payments |
|
|
|
|
| Additional |
|
|
|
| Accumulated Other |
|
|
|
| Non- |
| Payments |
| ||||||||
|
| Common |
| Paid-In |
| Treasury |
| Comprehensive |
| Retained |
| Controlling |
| Subject to |
|
| Common |
| Paid-In |
| Treasury |
| Comprehensive |
| Retained |
| Controlling |
| Subject to |
| ||||||||||||||
(in millions) |
| Stock |
| Capital |
| Stock |
| Loss |
| Earnings |
| Interests |
| Redemption |
|
| Stock |
| Capital |
| Stock |
| Loss |
| Earnings |
| Interests |
| Redemption |
| ||||||||||||||
Balance, December 31, 2015 |
| $ | 1 |
| $ | 1,160 |
| $ | (467) |
| $ | (1,102) |
| $ | 2,552 |
| $ | 36 |
| $ | 24 |
| ||||||||||||||||||||||
Balance, December 31, 2016 |
| $ | 1 |
| $ | 1,149 |
| $ | (413) |
| $ | (1,071) |
| $ | 2,899 |
| $ | 30 |
| $ | 30 |
| ||||||||||||||||||||||
Net income attributable to Ingredion |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 254 |
|
|
|
|
|
|
|
Net income attributable to non-controlling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6 |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (101) |
|
| (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (73) |
|
| (11) |
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
| (123) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Share-based compensation, net of issuance |
|
|
|
|
| (14) |
|
| 53 |
|
|
|
|
|
|
|
|
|
|
| 3 |
|
|
|
|
|
| (8) |
|
| 21 |
|
|
|
|
|
|
|
|
|
|
| (3) |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 78 |
|
|
|
|
| (10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 42 |
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016 |
| $ | 1 |
| $ | 1,146 |
| $ | (414) |
| $ | (1,024) |
| $ | 2,842 |
| $ | 28 |
| $ | 27 |
| ||||||||||||||||||||||
Balance, June 30, 2017 |
| $ | 1 |
| $ | 1,141 |
| $ | (515) |
| $ | (1,029) |
| $ | 3,080 |
| $ | 25 |
| $ | 27 |
|
See Notes to Condensed Consolidated Financial Statements
5
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Ingredion Incorporated (“Ingredion”)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
|
| Six Months Ended |
| ||||||||
|
| September 30, |
|
| June 30, |
| ||||||||
(in millions) |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||||
Cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 429 |
| $ | 399 |
|
| $ | 259 |
| $ | 260 |
|
Non-cash charges to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 156 |
|
| 146 |
|
|
| 107 |
|
| 103 |
|
Mechanical stores expense |
|
| 29 |
|
| 28 |
| |||||||
Deferred income taxes |
|
| 8 |
|
| (2) |
| |||||||
Charge for fair value markup of acquired inventory |
|
| 9 |
|
| — |
|
|
| — |
|
| 9 |
|
Other |
|
| 54 |
|
| 59 |
|
|
| 21 |
|
| 23 |
|
Changes in working capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and prepaid expenses |
|
| 15 |
|
| (56) |
|
|
| (3) |
|
| 7 |
|
Inventories |
|
| (33) |
|
| (8) |
|
|
| (73) |
|
| (36) |
|
Accounts payable and accrued liabilities |
|
| (92) |
|
| 18 |
|
|
| (23) |
|
| (92) |
|
Decrease in margin accounts |
|
| 10 |
|
| 1 |
| |||||||
Margin accounts |
|
| (4) |
|
| 13 |
| |||||||
Other |
|
| (24) |
|
| (17) |
|
|
| 31 |
|
| (11) |
|
Cash provided by operating activities |
|
| 524 |
|
| 542 |
|
|
| 352 |
|
| 302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net of proceeds on disposals |
|
| (222) |
|
| (197) |
| |||||||
Capital expenditures and mechanical stores purchases, net of proceeds on disposals |
|
| (160) |
|
| (144) |
| |||||||
Payments for acquisitions |
|
| — |
|
| (13) |
| |||||||
Short-term investments |
|
| (9) |
|
| (7) |
|
|
| 3 |
|
| (8) |
|
Payments for acquisitions |
|
| (13) |
|
| — |
| |||||||
Other |
|
| 2 |
|
| — |
| |||||||
Cash used for investing activities |
|
| (244) |
|
| (204) |
|
|
| (155) |
|
| (165) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
| 1,085 |
|
| 793 |
|
|
| 131 |
|
| 585 |
|
Payments on debt |
|
| (1,164) |
|
| (742) |
|
|
| (319) |
|
| (592) |
|
Debt issuance costs |
|
| — |
|
| (4) |
| |||||||
(Repurchase) issuance of common stock, net |
|
| (120) |
|
| 21 |
| |||||||
Dividends paid (including to non-controlling interests) |
|
| (120) |
|
| (103) |
| |||||||
Repurchases of common stock |
|
| (141) |
|
| (133) |
| |||||||
Issuances of common stock for share-based compensation, net of settlements |
|
| (3) |
|
| 5 |
| |||||||
Dividends paid, including to non-controlling interests |
|
| (92) |
|
| (83) |
| |||||||
Cash used for financing activities |
|
| (319) |
|
| (35) |
|
|
| (424) |
|
| (218) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of foreign exchange rate changes on cash |
|
| 18 |
|
| 14 |
|
|
| (9) |
|
| 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
| (21) |
|
| 317 |
| |||||||
Decrease in cash and cash equivalents |
|
| (236) |
|
| (71) |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
| 512 |
|
| 434 |
|
|
| 595 |
|
| 512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
| $ | 491 |
| $ | 751 |
|
| $ | 359 |
| $ | 441 |
|
See Notes to Condensed Consolidated Financial Statements
6
INGREDION INCORPORATED (“Ingredion”)
Notes to Condensed Consolidated Financial Statements
1. Interim Financial Statements
References to the “Company” are to Ingredion Incorporated (“Ingredion”) and its consolidated subsidiaries. These statements should be read in conjunction with the consolidated financial statements and the related notes to those statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
The unaudited Condensed Consolidated Financial Statements included herein were prepared by management on the same basis as the Company’s audited Consolidated Financial Statements for the year ended December 31, 20162017 and reflect all adjustments (consisting solely of normal recurring items unless otherwise noted) which are, in the opinion of management, necessary for the fair presentation of results of operations and cash flows for the interim periods ended SeptemberJune 30, 20172018 and 2016,2017, and the financial position of the Company as of SeptemberJune 30, 2017.2018. The results for the interim periods are not necessarily indicative of the results expected for the full years.
2. Recently Adopted and New Accounting Standards
Recently Adopted Accounting Standards: Standards
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606):
In July 2015,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adopted this Update in the current year and it did not have a material impact on our audited Condensed Consolidated Financial Statements.
New Accounting Standards: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) that introducesintroduced 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. ThisThe 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 this 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
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 byJanuary 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”). The Company performed detailed procedures to date, our assessment is that the adoption of the guidance in this Update isreview its revenue contracts held with its customers and did not expected to have a material impact on the Company’s revenue recognition timing or amounts, as we have not identifiedidentify any changes to the recognitionnature, amount, timing or uncertainty of revenue for existing customer contracts.
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 the contracts with customers as 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 asresult of the effective date. Adoption will require a modified retrospective approach for the 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 Consolidated Balance Sheet. We are in the process of quantifying the magnitude of these changes and assessing the implementation approach for accounting for these changes.new revenue standard.
The new revenue standard requires the Company to recognize revenue under the core principle to depict the transfer of products to customers in an amount reflecting the consideration the Company expects to receive. In January 2017,order to achieve that core principle, the FASB issued ASU No. 2017-04, Intangibles – GoodwillCompany applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and Other (Topic 350): Simplifying the Test for Goodwill Impairment(5) recognize revenue when a performance obligation is satisfied.
. This Update simplifies the subsequent measurement of GoodwillThe Company identified customer purchase orders, which in some cases are governed by a master sales agreement, 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 unitcontracts with its carrying amount. An entity should then recognize an impairment chargecustomers. For each contract, the Company considers the transfer of products, each of which is distinct, to be the identified performance obligation. In determining the transaction price for the amount byperformance obligation, the Company evaluates whether the price is subject to adjustment to determine the consideration to which the carrying amount exceedsCompany expects to be entitled. The pricing model can be fixed or variable within the reporting unit’s faircontract. The variable pricing model is based on historical commodity pricing and is determinable prior to completion of the 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. The product price as specified in the contract, net of
7
any discounts, is considered the standalone 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 ownership having transferred to the customer.
Historically, the Company included warehousing costs as a reduction of net sales before shipping and handling costs. In connection with the loss recognizedadoption of the new revenue standard, the Company determined these warehousing costs which were previously included as a reduction in net sales before shipping and handling costs are more appropriately classified as fulfillment activities. Therefore, upon adoption of the new revenue standard, the Company elected to include these costs within shipping and handling costs. The Company has elected to continue to classify shipping and handling costs as a reduction of net sales after implementing the new revenue standard consistent with its historical presentation. The Company has elected to make this adjustment on a retrospective basis, resulting in the change to the Condensed Consolidated Statements of Income shown below. The Company notes that the reclassification does not change reported net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2017 |
| Six Months Ended June 30, 2017 |
| ||||||||
(in millions) |
| As Reported |
| As Adjusted |
| As Reported |
| As Adjusted |
| ||||
Condensed Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales before shipping and handling costs |
| $ | 1,542 |
| $ | 1,558 |
| $ | 3,079 |
| $ | 3,110 |
|
Less: shipping and handling costs |
|
| 85 |
|
| 101 |
|
| 169 |
|
| 200 |
|
Net sales |
| $ | 1,457 |
| $ | 1,457 |
| $ | 2,910 |
| $ | 2,910 |
|
The Company used the full retrospective method, which requires the restatement of all previously presented financial results. The adoption of the new standard did not result in any retrospective changes to exceed the total amountCompany’s Condensed Consolidated Statements of goodwill allocatedComprehensive Income, Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Equity and Redeemable Equity, or the Condensed Consolidated Statements of Cash Flows. For detailed information about the Company’s revenue recognition refer to that reporting unit. This Update is effective for annual periods beginning after December 15, 2019, with early adoption permitted. Note 4 of the Notes to the Condensed Consolidated Financial Statements.
ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715):
In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This Update requires an entity to change the classification of the net periodic benefit cost for pension and postretirement plans within the statement of income by eliminating the ability to net all of the components of the costs together within operating income. The Update will requirerequires the service cost component to continue to be presented within operating income, classified within either cost of sales or operating expenses depending on the employees covered within the plan. The remaining components of the net periodic benefit cost, however, must be presented in the statement of income as a non-operating income (loss) below operating income. The Update was effective for annual periods beginning after December 15, 2017.
As of January 1, 2018, the Company adopted the amendments to ASC 715. The Company retrospectively adopted the presentation of service cost separate from the other components of net periodic costs for all periods presented. The interest cost, expected return on assets, amortization of prior service costs, net remeasurement, and other costs have been reclassified from cost of sales and operating expenses to other, non-operating income. The Company elected to apply the practical expedient which allows it to reclassify amounts disclosed previously in the retirement benefits note as the basis for applying retrospective presentation for comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. On a prospective basis, the other components of net periodic benefit costs will not be included in amounts capitalized in inventory.
8
The adoption of the new standard did not result in any retrospective changes to the Company’s Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Equity and Redeemable Equity, or the Condensed Consolidated Statements of Cash Flows. The adoption of the new standard impacted the presentation of the Company’s previously reported results in the Condensed Consolidated Statements of Income and Note 6 of the Condensed Consolidated Financial Statements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2017 |
| Six Months Ended June 30, 2017 |
| ||||||||
(in millions) |
| As Reported |
| As Adjusted |
| As Reported |
| As Adjusted |
| ||||
Condensed Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
| $ | 1,084 |
| $ | 1,084 |
| $ | 2,185 |
| $ | 2,186 |
|
Gross profit |
|
| 373 |
|
| 373 |
|
| 725 |
|
| 724 |
|
Operating expenses |
|
| 157 |
|
| 158 |
|
| 306 |
|
| 308 |
|
Operating income |
|
| 211 |
|
| 210 |
|
| 406 |
|
| 403 |
|
Other, non-operating income |
|
| — |
|
| (1) |
|
| — |
|
| (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2017 |
| Six Months Ended June 30, 2017 |
| ||||||||
(in millions) |
| As Reported |
| As Adjusted |
| As Reported |
| As Adjusted |
| ||||
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 181 |
| $ | 180 |
| $ | 341 |
| $ | 338 |
|
South America |
|
| 4 |
|
| 4 |
|
| 18 |
|
| 19 |
|
Asia Pacific |
|
| 29 |
|
| 30 |
|
| 59 |
|
| 60 |
|
EMEA |
|
| 29 |
|
| 29 |
|
| 57 |
|
| 57 |
|
Corporate |
|
| (22) |
|
| (23) |
|
| (42) |
|
| (44) |
|
Subtotal |
|
| 221 |
|
| 220 |
|
| 433 |
|
| 430 |
|
Total operating income |
| $ | 211 |
| $ | 210 |
| $ | 406 |
| $ | 403 |
|
Adoption of Highly Inflationary Accounting in Argentina
ASC 830, Foreign Currency Matters requires the use of highly inflationary accounting for countries whose cumulative three-year inflation exceeds 100 percent. The Company has been closely monitoring the inflation data and currency volatility in Argentina, where there are multiple data sources for measuring and reporting inflation. In the second quarter of 2018, the Argentine peso 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, the Company elected to adopt highly inflationary accounting as of July 1, 2018 for its affiliate, Ingredion Argentina S.A. (“Argentina”). Under highly inflationary accounting, Argentina’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. As of June 30, 2018, Argentina had a small net peso monetary liability position. Net sales of Argentina were less than four percent of the Company’s consolidated net sales for the six months ended June 30, 2018.
New Accounting Standards
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. The FASB also issued ASU 2018-11 to provide further updates and clarification to this Update. This Update is effective for annual periods beginning after December 15, 2017,2018, with early adoption permitted only within the first interim period for public entities. We planpermitted. The Company currently plans to adopt this Update in 2018. When adopted, the new guidance must be applied retrospectively for all income statement periods presented. The Update will reduce the Company’s operating income andstandard on January 1, 2019. Adoption will require a new financial statement line item below operating income within the Condensed Consolidated Statements of Incomemodified retrospective approach for the non-operating income (loss) components. Net income withintransition. The Company expects the Condensed Consolidated Statements of Income will not change upon adoption of the Update.guidance in this Update to have a material impact on its Consolidated Balance Sheets as operating leases will be recognized both as assets and liabilities on the Consolidated Balance Sheets. The Company’s adoption process is ongoing, including evaluating and quantifying the impact on its consolidated financial statements, identifying the population of leases (and embedded leases), implementing a selected technology solution and collecting and validating lease data.
9
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. 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.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting 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 and increase transparency of information about an entity’s risk management activities. The amended guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. We areThe Company is in the process of assessing the effects of these updates including potential changes to existing hedging arrangement,arrangements, as well as the implementation approach for accounting for these changes. The Company intends to adopt this standard on January 1, 2019.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This Update allows for the reclassification of stranded tax effects on items resulting from the Tax Cuts and Jobs Act (“TCJA”) from accumulated other comprehensive income to retained earnings. Tax effects unrelated to the 2017 Tax Act are released from AOCI using either the specific identification approach or the portfolio approach based on the nature of the underlying item. The guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact. The Company anticipates adopting this guidance at the earlier of January 1, 2019 or upon finalization of provisional amounts related to the TCJA.
3. Acquisitions
On March 9, 2017, the Company completed its acquisition of Sun Flour Industry Co., Ltd. (“Sun Flour”) in Thailand for $18 million. Upon closing,As of June 30, 2018, the Company has paid $13$16 million in cash and recorded $5$2 million in accrued liabilities for deferred payments due to the previous owner. The Company funded the acquisition primarily with cash on hand.on-hand. The acquisition of Sun Flour addsadded a fourth manufacturing facility to ourthe Company’s operations in Thailand. Sun Flour produces rice-based ingredients used primarily in the food industry. The results of the acquired operation are included in the Company’s consolidated results from the acquisition date forward within the Asia Pacific business segment, and $14 million of goodwill was allocated to that segment.
On December 29, 2016, the Company completed its acquisition of TIC Gums Incorporated (“TIC Gums”), a privately held, U.S.-based company that provides advanced texture systems to the food and beverage industry, for $396 million, net of cash acquired. The acquisition adds a manufacturing facility in both the U.S. and China. The Company funded the acquisition with proceeds from borrowings under its revolving credit agreement. The results of the acquired operations are included in the Company’s consolidated results from the respective acquisition dates forward within the North America and Asia Pacific business segments.
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 Company funded the acquisition primarily with cash on hand. The acquisition of Shandong Huanong, located in Shandong Province, adds 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 results of the acquired operation are included in the Company’s consolidated results from the acquisition date forward within the Asia Pacific business segment.
A preliminary allocation offinalized the purchase price toallocation for all areas for the assets acquired and liabilities assumed was made based on available information and incorporating management’s best estimates.Sun Flour acquisition during the first quarter of 2018. The assets acquired and liabilities assumed for each acquisition in the transactions are generally recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisitions were expensed as incurred.
The purchase accounting for TIC Gums is still open, pending finalization of goodwill and taxes. Allintangible assets did not have a significant impact on previously estimated amounts. The acquisition of Sun Flour added $15 million to goodwill and identifiable intangible assets and $3 million to net tangible assets as of the recorded assets and liabilities, including working capital, property, plant and equipment (“PP&E”), goodwill, and intangibles, are open for performing purchase accounting adjustments for Sun Flour. Purchase accounting adjustments for Shandong Huanong remain open to finalize the valuation of intangible assets.
8
acquisition date.
Goodwill represents the amount by which the purchase price exceeds the estimated fair value of the net assets acquired. The goodwill results from synergies and other operational benefits expected to be derived from the acquisitions. The goodwill related to TIC Gums and Shandong Huanong is tax deductible due to the structure of the acquisitions. The goodwill related to Sun Flour is not tax deductible.
The following table summarizes the preliminary purchase price allocation for the acquisition of TIC Gums as of December 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
| Preliminary |
|
(in millions) |
|
| TIC Gums |
|
Working capital (excluding cash) |
| $ | 49 |
|
Property, plant and equipment |
|
| 37 |
|
Identifiable intangible assets |
|
| 133 |
|
Goodwill |
|
| 177 |
|
Total purchase price, net of cash |
| $ | 396 |
|
The identifiable intangible assets for the acquisition of TIC Gums included items such as customer relationships, trade names, and proprietary technology. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Estimated |
|
| Fair Value |
| Valuation Technique |
| Useful Life | |
Customer relationships |
| $ | 94 |
| Multi-period excess earnings method |
| 20 years |
Trade names |
|
| 35 |
| Relief-from-royalty method |
| Indefinite |
Proprietary technology |
|
| 4 |
| Relief-from-royalty method |
| 8 years |
The acquisitions of Sun Flour and Shandong Huanong added $21 million to goodwill and identifiable intangible assets and $9 million to net tangible assets as of their respective acquisition dates.
Included in the results of the acquired businesses for the nine months ended September 30, 2017 was an increase in cost of sales of $9 million relating to the sale of inventory that was adjusted to fair value at the acquisition dates for each acquired business in accordance with business combination accounting rules. The fair value adjustments for the three months ended September 30, 2017 had no effect on cost of sales.
Pro-forma results of operations for the acquisitionsacquisition made in 2017 and 2016 havehas 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 $1 million and $3 million ofimmaterial pre-tax acquisition and integration costs for the three and ninesix months ended SeptemberJune 30, 2017, respectively, associated with its recent acquisitions. In 2016, the2018. The Company incurred $2 million of pre-tax acquisition and integration costs for the ninesix months ended SeptemberJune 30, 20162017 associated with the 2015 acquisitions of Kerr Concentrates, Inc. and Penford Corporation. Pre-tax acquisition and integration costs incurred for the three months ended September 30, 2016 were not significant.its recent acquisitions.
4. Impairment and Restructuring Charges
For the three and nine months ended September 30, 2017, the Company recorded $7 million and $23 million, respectively, of pre-tax restructuring charges. During the first quarter of 2017, the Company implemented an organizational restructuring effort in Argentina in order to achieve a more competitive cost position. The Company notified the local labor union of a planned reduction in workforce, which resulted in a strike by the labor union and an interruption of manufacturing activities during the second quarter of 2017. The Company finalized a new labor agreement with the labor union in the second quarter, ending the strike on June 1, 2017. For the nine months ended September 30, 2017, the Company recorded total pre-tax restructuring-related charges in Argentina of $17 million for employee-related severance and other costs. No additional charges were recorded for the three months ended September 30, 2017.
910
4. Revenue Recognition
DuringThe Company applies the second quarterprovisions of 2017,ASC 606-10, Revenue from Contracts with Customers. The Company recognizes revenue under the Company announced a Finance Transformation initiativecore principle to depict the transfer of products to customers in North America foran amount reflecting the U.S. and Canada businesses to strengthen organizational capabilities and drive efficiencies to supportconsideration the growth strategy of the Company. For the three and nine months ended September 30, 2017, the Company recorded pre-tax restructuring charges of $4 million ($3 million of severance costs and $1 million of other costs) and $5 million ($3 million of severance costs and $2 million of other costs), respectively, related to this initiative. The Company expects to incur between $3 million and $5 million of employee-related severance and other costsreceive. 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 the fourth quarter of 2017contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and between $1 million and $2 million in 2018 related to this initiative.(5) recognize revenue when a performance obligation is satisfied.
Additionally,The Company identified customer purchase orders, which in some cases are governed by a master sales agreement, as the contracts with its customers. For each contract, the Company considers the transfer of products, each of which is distinct, to be the identified performance obligation. In determining the transaction price for the three months ended September 30, 2017,performance obligation, the Company recorded $3 million of other pre-tax restructuring costs including employee-related severance costs in North America. Forevaluates whether the nine months ended September 30, 2017,price is subject to adjustment to determine the consideration to which the Company recorded $1 millionexpects 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 other pre-tax restructuring charges including other employee-related severance costs in North America and a refinement of estimates for prior year restructuring activities.
During the third quarter of 2016,performance obligation. Additionally, the Company recorded $2 million of restructuring chargeshas certain sales adjustments for employee-related severancevolume incentive discounts and other costs duediscount 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 executiontransaction price have not materially differed. Volume incentives and discounts are accrued at the satisfaction of global information technology (“IT”) outsourcing contracts. For the nine months ended Septemberperformance obligation and accounted for in accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. These amounts are not significant as of June 30, 2016,2018 and December 31, 2017. The product price as specified in the contract, net of any discounts, is considered the standalone 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 recorded $15 million of restructuring charges consisting of $10 million of employee-related severance and other costs duehas elected the practical expedient under ASC 606-10-32-18 to the execution of global IT outsourcing contracts, $3 million of employee-related severance costs associated with the Company’s optimization initiative in South America and $2 million of costs attributable to the 2015 Port Colborne plant sale.
A summary of the Company’s severance accrual as of September 30, 2017 is as follows (in millions):not assess whether a contract has a significant financing component.
|
|
|
|
|
Balance in severance accrual as of December 31, 2016 |
| $ | 7 |
|
Restructuring charge for employee-related severance costs: |
|
|
|
|
Argentina |
|
| 15 |
|
North America Finance Transformation |
|
| 3 |
|
Other |
|
| 2 |
|
Prior year restructuring activities |
|
| (2) |
|
Payments made to terminated employees |
|
| (14) |
|
Balance in severance accrual as of September 30, 2017 |
| $ | 11 |
|
OfRevenue is recognized when the $11 million severance accrual asCompany’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 September 30, 2017, $9 million is expectedownership having transferred to be paid in the next 12 months.customer.
Shipping and handling activities related to contracts with customers represent fulfillment costs and are presented as a reduction of net sales. Taxes assessed by governmental authorities and collected from customers are accounted for on a net basis and excluded from revenues. The Company applies a practical expedient to expense costs to obtain a contract as incurred as most contracts are one year or less. These costs are comprised primarily from the Company’s internal sales force compensation program. Under the terms of these programs these are generally earned and the costs are recognized at the time the revenue is recognized.
5. Segment InformationFrom 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 significant contract assets or liabilities. Any such arrangements are accounted for in other assets or accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets. There were no significant contract assets or liabilities as of June 30, 2018 and December 31, 2017.
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”). The nature, amount, timing and uncertainty of the Company’s net sales are managed by the Company primarily based on its geographic segments. Each region’s product sales are unique to each region and have unique risks.
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
(in millions) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
Net sales to unaffiliated customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 916 |
| $ | 905 |
| $ | 1,790 |
| $ | 1,786 |
|
South America |
|
| 232 |
|
| 228 |
|
| 481 |
|
| 483 |
|
Asia Pacific |
|
| 201 |
|
| 187 |
|
| 395 |
|
| 366 |
|
EMEA |
|
| 147 |
|
| 137 |
|
| 299 |
|
| 275 |
|
Total |
| $ | 1,496 |
| $ | 1,457 |
| $ | 2,965 |
| $ | 2,910 |
|
Additionally, the nature, amount, timing and uncertainty of the Company’s net sales are managed based on its global customer mix. The Company sells to customers in a broad range of industries and evaluates the economic factors impacting its net sales through consideration of the industries into which its products are sold. Four distinct industries it focuses on are food, beverage, brewing (collectively, food & beverage ingredients) and animal nutrition. The following table, which is gathered using customer industry classifications, disaggregates the Company’s net sales by industry served:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
(in millions) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
Food |
| $ | 799 |
| $ | 777 |
| $ | 1,583 |
| $ | 1,538 |
|
Beverage |
|
| 165 |
|
| 168 |
|
| 331 |
|
| 329 |
|
Brewing |
|
| 114 |
|
| 101 |
|
| 217 |
|
| 213 |
|
Food and Beverage Ingredients |
|
| 1,078 |
|
| 1,046 |
|
| 2,131 |
|
| 2,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Nutrition |
|
| 153 |
|
| 146 |
|
| 303 |
|
| 295 |
|
Other |
|
| 265 |
|
| 265 |
|
| 531 |
|
| 535 |
|
Total Net sales |
| $ | 1,496 |
| $ | 1,457 |
| $ | 2,965 |
| $ | 2,910 |
|
5. Impairment and Restructuring Charges
For the three and six months ended June 30, 2018, the Company recorded $8 million and $11 million of pre-tax restructuring charges, respectively. 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. The Company recorded $6 million of employee-related severance costs related to its Cost Smart SG&A program for the three and six months ended June 30, 2018 in its South America and North America segments. The Company also recorded other costs related to the Finance Transformation initiative of $2 million and $4 million for the three and six months ended June 30, 2018, respectively. In addition, there were other restructuring costs related to the leaf extraction process in Brazil of $1 million for the six months ended June 30, 2018.
For the three and six months ended June 30, 2017, the Company recorded $6 million and $16 million, respectively, of net restructuring charges. For the three and six months ended June 30, 2017, the Company recorded total pre-tax restructuring-related charges in Argentina of $6 million and $17 million, respectively, for employee-related severance and other costs related to an organizational restructuring effort. The Company recorded $1 million of other costs related to the Finance Transformation initiative in the three and six months ended June 30, 2017, respectively. Additionally, for the three and six months ended June 30, 2017, the Company recorded a reduction in employee severance costs of $1 million and $2 million, respectively, related to the refinement of estimates for prior year restructuring activities.
A summary of the Company’s employee-related severance accrual as of June 30, 2018 is as follows (in millions):
|
|
|
|
|
Balance in employee-related severance accrual as of December 31, 2017 |
| $ | 11 |
|
Cost Smart severance |
|
| 6 |
|
Payments made to terminated employees |
|
| (4) |
|
Foreign exchange translation |
|
| (2) |
|
Balance in employee-related severance accrual as of June 30, 2018 |
| $ | 11 |
|
Of the $11 million severance accrual as of June 30, 2018, $10 million is expected to be paid in the next 12 months.
12
On July 11, 2018, the Board of Directors authorized the cessation of wet-milling at the Stockton, California plant and the establishment of a shipping distribution station at that facility by the end of 2018, as part of the Cost Smart cost of sales program. The Company expects the cessation of wet-milling at the Stockton plant to result in up to $53 million of pre-tax restructuring-related charges in 2018. The Company expects fixed asset accelerated depreciation of $38 million and mechanical stores write-downs of up to $8 million to be incurred in the third and fourth quarters of 2018 as the manufacturing operations are wound down. Estimated pre-tax, employee-related severance and other restructuring costs associated with the closure are approximately $7 million, including employee-related severance of $3 million and other closing costs of $4 million. There were no restructuring charges related to the Stockton plant for the three or six months ended June 30, 2018.
6. 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 EMEA. Its North America segment includes businesses in the U.S., 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, China, Japan, Indonesia, the Philippines, Singapore, Malaysia, India, Australia and New Zealand. The Company’s EMEA segment includes businesses in Germany, the United Kingdom, Pakistan, South Africa and Kenya. The Company does not aggregate its operating segments when determining its reportable segments. Net sales by product are not presented because to do so would be impracticable.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||
|
| September 30, |
| September 30, |
|
| June 30, |
| June 30, |
| ||||||||||||||||
(in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Net sales to unaffiliated customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 903 |
| $ | 899 |
| $ | 2,689 |
| $ | 2,634 |
|
| $ | 916 |
| $ | 905 |
| $ | 1,790 |
| $ | 1,786 |
|
South America |
|
| 257 |
|
| 276 |
|
| 740 |
|
| 731 |
|
|
| 232 |
|
| 228 |
|
| 481 |
|
| 483 |
|
Asia Pacific |
|
| 189 |
|
| 185 |
|
| 555 |
|
| 534 |
|
|
| 201 |
|
| 187 |
|
| 395 |
|
| 366 |
|
EMEA |
|
| 136 |
|
| 129 |
|
| 411 |
|
| 405 |
|
|
| 147 |
|
| 137 |
|
| 299 |
|
| 275 |
|
Total |
| $ | 1,485 |
| $ | 1,489 |
| $ | 4,395 |
| $ | 4,304 |
|
| $ | 1,496 |
| $ | 1,457 |
| $ | 2,965 |
| $ | 2,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 179 |
| $ | 164 |
| $ | 520 |
| $ | 474 |
|
| $ | 150 |
| $ | 180 |
| $ | 293 |
| $ | 338 |
|
South America |
|
| 26 |
|
| 27 |
|
| 44 |
|
| 59 |
|
|
| 20 |
|
| 4 |
|
| 46 |
|
| 19 |
|
Asia Pacific |
|
| 29 |
|
| 29 |
|
| 88 |
|
| 87 |
|
|
| 27 |
|
| 30 |
|
| 50 |
|
| 60 |
|
EMEA |
|
| 26 |
|
| 25 |
|
| 83 |
|
| 80 |
|
|
| 29 |
|
| 29 |
|
| 60 |
|
| 57 |
|
Corporate |
|
| (19) |
|
| (22) |
|
| (61) |
|
| (64) |
|
|
| (25) |
|
| (23) |
|
| (48) |
|
| (44) |
|
Subtotal |
|
| 241 |
|
| 223 |
|
| 674 |
|
| 636 |
|
|
| 201 |
|
| 220 |
|
| 401 |
|
| 430 |
|
Restructuring charges |
|
| (7) |
|
| (2) |
|
| (23) |
|
| (15) |
| |||||||||||||
Restructuring/impairment charges |
|
| (8) |
|
| (6) |
|
| (11) |
|
| (16) |
| |||||||||||||
Acquisition/integration costs |
|
| (1) |
|
| — |
|
| (3) |
|
| (2) |
|
|
| — |
|
| — |
|
| — |
|
| (2) |
|
Charge for fair value markup of acquired inventory |
|
| — |
|
| — |
|
| (9) |
|
| — |
|
|
| — |
|
| (4) |
|
| — |
|
| (9) |
|
Total |
| $ | 233 |
| $ | 221 |
| $ | 639 |
| $ | 619 |
| |||||||||||||
Total operating income |
| $ | 193 |
| $ | 210 |
| $ | 390 |
| $ | 403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
| As of |
| As of |
|
|
|
|
|
| As of |
| As of |
| |||||||
(in millions) |
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
|
|
|
|
|
|
| June 30, 2018 |
| December 31, 2017 |
| ||||||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
North America |
|
|
|
|
|
| $ | 3,699 |
| $ | 3,796 |
|
|
|
|
|
| $ | 3,728 |
| $ | 3,967 |
| |||
South America |
|
|
|
|
|
|
| 877 |
|
| 809 |
|
|
|
|
|
|
| 694 |
|
| 812 |
| |||
Asia Pacific |
|
|
|
|
|
|
| 796 |
|
| 697 |
|
|
|
|
|
|
| 798 |
|
| 774 |
| |||
EMEA |
|
|
|
|
|
|
| 521 |
|
| 480 |
|
|
|
|
|
|
| 528 |
|
| 527 |
| |||
Total |
|
|
|
|
|
| $ | 5,893 |
| $ | 5,782 |
|
|
|
|
|
| $ | 5,748 |
| $ | 6,080 |
|
6.7. Financial Instruments, Derivatives and Hedging Activities
The Company is exposed to market risk stemming from changes in commodity prices (primarily corn and natural gas), foreign currency exchange rates and interest rates. In the normal course of business, the Company actively manages
13
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 grade counterparties. Derivative financial instruments currently used by the Company consist of commodity-related futures, options and swap contracts, foreign currency-related forward contracts, interest rate swaps and Treasury lock agreements (“T-Locks”).
Commodity price 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 12 to 24 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 in North America, the Company uses corn futures and options contracts that trade on regulated commodity exchanges to lock-in its corn costs associated with firm-pricedfixed-priced customer sales contracts. The Company uses over-the-counter natural gas swaps to hedge a portion of its natural gas usage in North America. These derivative financial instruments limit the impact that volatility resulting from fluctuations in market prices will have on corn and natural gas purchases and have been designated as cash-flowcash flow hedges. The Company also enters into futures contracts to hedge price risk associated with fluctuations in the market price of ethanol. 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 Condensed Consolidated Balance Sheets as part of accumulated other comprehensive income/loss (“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,
11
highly effective at offsetting changes in the price of the hedged items. The amounts representing the ineffectiveness of these cash-flowcash flow hedges are not significant.
At SeptemberAs of June 30, 2017,2018, AOCI included $5$7 million of losses (net of income taxes of $4$5 million), pertaining to commodities-related derivative instruments designated as cash-flowcash flow hedges. AtAs of December 31, 2016, the amount2017, AOCI included in AOCI$12 million of losses (net of tax of $7 million), pertaining to these commodities-related derivative instruments designated as cash-flow hedges was not significant.cash flow hedges.
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 maintains risk management control systems 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 interest rate swaps and T-Locks. The Company periodically enters into T-Locks to hedge its exposure to interest rate 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 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 Company also has an interest rate swap agreementsagreement that effectively convertconverts the interest rates on $200 million of its $400 million of 4.625 percent senior notes due November 1, 2020, to variable rates. TheseThis swap agreements callagreement 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 LIBOR rate plus a spread. The Company has 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 accounts for themit as fair-value hedges. Changesa fair value hedge. The change in the fair value of an interest rate swapsswap designated as a hedging instrumentsinstrument that effectively offsetoffsets the variability in the fair value of outstanding debt obligations areis reported in earnings. These amounts offsetThis 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. The fair value of thesethe interest rate swap agreements at Septemberagreement as of
14
June 30, 2017 and December 31, 20162018, was a $3 million and $3 million, respectively,loss, and is reflected in the Condensed Consolidated Balance Sheets within non-current liabilities, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligations. As of December 31, 2017, the fair value of the interest rate swap agreement was a $1 million gain, and is reflected in the Condensed Consolidation Balance Sheets within other assets, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligations. The Company did not have any T-Locks outstanding at Septemberas of June 30, 20172018 or December 31, 2016.2017.
At SeptemberAs of June 30, 2017,2018, AOCI included $3$2 million of losses (net of income taxes of $2$1 million), related to settled T-Locks. AtAs of December 31, 2016,2017, AOCI included $4$2 million of losses (net of income taxes of $2$1 million), 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.
Foreign currency hedging: Due to the Company’s global operations, including operations in 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 U.S. 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 SeptemberAs of June 30, 2017,2018, the Company had foreign currency forward sales contracts that are designated as fair value hedges with an aggregate notional amount of $426 million and foreign currency forward purchase contracts with an aggregate notional amount of $135 million that hedged transactional exposures. As of December 31, 2017, the Company had foreign currency forward sales contracts with an aggregate notional amount of $447 million and foreign currency forward purchase contracts with an aggregate notional amount of $173$121 million that hedged transactional exposures. 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.
The Company also has foreign currency derivative instruments that hedge certain foreign currency transactional exposures and are designated as cash-flowcash flow hedges. At SeptemberAs of June 30, 2017,2018, AOCI included $1 million of losses (net of an insignificant amount of losses relatingtax) related to these hedges. Atforeign currency derivative instruments. As of December 31, 2016,2017, AOCI included $3$1 million of losses, netgains (net of tax, relatingincome taxes of $1 million) related to these hedges.
12
The fair value and balance sheet location of the Company’s derivative instruments, presented gross in the Condensed Consolidated Balance Sheets, are reflected below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value of Derivative Instruments |
| ||||||||||||||
|
|
|
| Fair Value |
|
|
| Fair Value |
| ||||||||
Derivatives designated as |
|
|
| As of |
| As of |
|
|
| As of |
| As of |
| ||||
hedging instruments: |
| Balance Sheet |
| September 30, |
| December 31, |
| Balance Sheet |
| September 30, |
| December 31, |
| ||||
(in millions) |
| Location |
| 2017 |
| 2016 |
| Location |
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity and foreign currency |
| Accounts receivable, net |
| $ | 14 |
| $ | 31 |
| Accounts payable and accrued liabilities |
| $ | 28 |
| $ | 25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity, foreign currency, and interest rate contracts |
| Other assets |
|
| 7 |
|
| 8 |
| Non-current liabilities |
|
| 7 |
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
| $ | 21 |
| $ | 39 |
|
|
| $ | 35 |
| $ | 27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value of Derivative Instruments as of June 30, 2018 |
| ||||||||
Derivatives Designated as Hedging Instruments (in millions): |
| Balance Sheet Location |
| Fair Value |
| Balance Sheet Location |
| Fair Value |
| ||
Commodity and foreign currency |
| Accounts receivable, net |
| $ | 12 |
| Accounts payable and accrued liabilities |
| $ | 22 |
|
Commodity, foreign currency and interest rate contracts |
| Other assets |
|
| 1 |
| Non-current liabilities |
|
| 11 |
|
|
|
|
| $ | 13 |
|
|
| $ | 33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value of Derivative Instruments as of December 31, 2017 |
| ||||||||
Derivatives Designated as Hedging Instruments (in millions): |
| Balance Sheet Location |
| Fair Value |
| Balance Sheet Location |
| Fair Value |
| ||
Commodity and foreign currency |
| Accounts receivable, net |
| $ | 11 |
| Accounts payable and accrued liabilities |
| $ | 23 |
|
Commodity, foreign currency and interest rate contracts |
| Other assets |
|
| 3 |
| Non-current liabilities |
|
| 8 |
|
|
|
|
| $ | 14 |
|
|
| $ | 31 |
|
At SeptemberAs of June 30, 2017,2018, the Company had outstanding futures and option contracts that hedged the forecasted purchase of approximately 6561 million bushels of corn and 20 million pounds of soybean oil.corn. 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. As of June 30, 2018, the Company had no outstanding future or option contracts for soybean oil. The Company also had outstanding swap and option contracts that hedged the forecasted purchase of approximately 2132 million mmbtu’s of natural gas at SeptemberJune 30, 2017.2018. Additionally, at Septemberas of June 30, 2017,2018, the Company had outstanding ethanol futures contracts that hedged the forecasted sale of approximately 86 million gallons of ethanol.
15
Additional information relating to the Company’s derivative instruments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
| Location of Gains |
|
|
|
|
|
|
|
|
|
|
|
|
| Location of Gains |
|
|
|
|
|
|
| ||
|
| Amount of Gains (Losses) |
| (Losses) |
| Amount of Gains (Losses) |
|
| Amount of Gains (Losses) |
| (Losses) |
| Amount of Gains (Losses) |
| ||||||||||||||||
Derivatives in Cash-Flow |
| Recognized in OCI |
| Reclassified from |
| Reclassified from AOCI into Income |
|
| Recognized in OCI |
| Reclassified from |
| Reclassified from AOCI into Income |
| ||||||||||||||||
Hedging Relationships |
| Three Months Ended |
| Three Months Ended |
| AOCI |
| Three Months Ended |
| Three Months Ended |
|
| Three Months Ended |
| Three Months Ended |
| AOCI |
| Three Months Ended |
| Three Months Ended |
| ||||||||
(in millions, pre-tax) |
| September 30, 2017 |
| September 30, 2016 |
| into Income |
| September 30, 2017 |
| September 30, 2016 |
|
| June 30, 2018 |
| June 30, 2017 |
| into Income |
| June 30, 2018 |
| June 30, 2017 |
| ||||||||
Commodity contracts |
| $ | (18) |
| $ | (27) |
| Cost of sales |
| $ | — |
| $ | (5) |
|
| $ | (17) |
| $ | 4 |
| Cost of sales |
| $ | 2 |
| $ | 2 |
|
Foreign currency contracts |
|
| 2 |
|
| — |
| Net sales/Cost of sales |
|
| 1 |
|
| — |
|
|
| (4) |
|
| — |
| Net sales/Cost of sales |
|
| — |
|
| — |
|
Interest rate contracts |
|
| — |
|
| — |
| Financing costs, net |
|
| — |
|
| (1) |
|
|
| — |
|
| — |
| Financing costs, net |
|
| (1) |
|
| — |
|
Total |
| $ | (16) |
| $ | (27) |
|
|
| $ | 1 |
| $ | (6) |
|
| $ | (21) |
| $ | 4 |
|
|
| $ | 1 |
| $ | 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Location of Gains |
|
|
|
|
|
|
|
|
| Amount of Gains (Losses) |
| (Losses) |
| Amount of Gains (Losses) |
| ||||||||
Derivatives in Cash-Flow |
| Recognized in OCI |
| Reclassified from |
| Reclassified from AOCI into Income |
| ||||||||
Hedging Relationships |
| Six Months Ended |
| Six Months Ended |
| AOCI |
| Six Months Ended |
| Six Months Ended |
| ||||
(in millions, pre-tax) |
| June 30, 2018 |
| June 30, 2017 |
| into Income |
| June 30, 2018 |
| June 30, 2017 |
| ||||
Commodity contracts |
| $ | 3 |
| $ | 11 |
| Cost of sales |
| $ | (3) |
| $ | (1) |
|
Foreign currency contracts |
|
| (2) |
|
| 1 |
| Net sales/Cost of sales |
|
| 1 |
|
| — |
|
Interest rate contracts |
|
| — |
|
| — |
| Financing costs, net |
|
| (1) |
|
| (1) |
|
Total |
| $ | 1 |
| $ | 12 |
|
|
| $ | (3) |
| $ | (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Location of Gains |
|
|
|
|
|
|
|
|
| Amount of Gains (Losses) |
| (Losses) |
| Amount of Gains (Losses) |
| ||||||||
Derivatives in Cash-Flow |
| Recognized in OCI |
| Reclassified from |
| Reclassified from AOCI into Income |
| ||||||||
Hedging Relationships |
| Nine Months Ended |
| Nine Months Ended |
| AOCI |
| Nine Months Ended |
| Nine Months Ended |
| ||||
(in millions, pre-tax) |
| September 30, 2017 |
| September 30, 2016 |
| into Income |
| September 30, 2017 |
| September 30, 2016 |
| ||||
Commodity contracts |
| $ | (7) |
| $ | (25) |
| Cost of sales |
| $ | (1) |
| $ | (25) |
|
Foreign currency contracts |
|
| 3 |
|
| 1 |
| Net sales/Cost of sales |
|
| 1 |
|
| (1) |
|
Interest rate contracts |
|
| — |
|
| — |
| Financing costs, net |
|
| (1) |
|
| (1) |
|
Total |
| $ | (4) |
| $ | (24) |
|
|
| $ | (1) |
| $ | (27) |
|
At SeptemberAs of June 30, 2017,2018, AOCI included $5$6 million of losses (net of income taxes of $3$2 million) on commodities-related derivative instruments designated as cash-flowcash flow hedges that are expected to be reclassified into earnings during the next 12 months. Transactions and events expected to occur over the next 12 months that will necessitate reclassifying these derivative gains to earnings include the sale of finished goods inventory, which includes previously hedged purchases of corn, natural gas, and ethanol. The Company expects the losses to be offset by changes in the underlying commodities costs. The Company also hasAdditionally, as of June 30, 2018, AOCI included $1 million of losses (net of an insignificant amount of taxes) on settled T-Locks (netand an insignificant amount of income taxes of $1 million) recorded in AOCI at September 30, 2017,losses related to foreign currency hedges which are expected to be reclassified into earnings during the next 12 months. Additionally, at September 30, 2017, AOCI included an insignificant amount of losses related to foreign currency hedges that are expected to be reclassified into earnings during the next 12 months.
13
Presented below are the fair values of the Company’s financial instruments and derivatives for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of September 30, 2017 |
| As of December 31, 2016 |
|
| As of June 30, 2018 |
| As of December 31, 2017 |
| ||||||||||||||||||||||||||||||||||||||||
(in millions) |
| Total |
| Level 1 (a) |
| Level 2 (b) |
| Level 3 (c ) |
| Total |
| Level 1 (a) |
| Level 2 (b) |
| Level 3 (c ) |
|
| Total |
| Level 1 (a) |
| Level 2 (b) |
| Level 3 (c) |
| Total |
| Level 1 (a) |
| Level 2 (b) |
| Level 3 (c) |
| ||||||||||||||||
Available for sale securities |
| $ | 9 |
| $ | 9 |
| $ | — |
| $ | — |
| $ | 7 |
| $ | 7 |
| $ | — |
| $ | — |
|
| $ | 10 |
| $ | 10 |
| $ | — |
| $ | — |
| $ | 10 |
| $ | 10 |
| $ | — |
| $ | — |
|
Derivative assets |
|
| 21 |
|
| 4 |
|
| 17 |
|
| — |
|
| 39 |
|
| 6 |
|
| 33 |
|
| — |
|
|
| 13 |
|
| 2 |
|
| 11 |
|
| — |
|
| 14 |
|
| 3 |
|
| 11 |
|
| — |
|
Derivative liabilities |
|
| 35 |
|
| 9 |
|
| 26 |
|
| — |
|
| 27 |
|
| 11 |
|
| 16 |
|
| — |
|
|
| 33 |
|
| 14 |
|
| 19 |
|
| — |
|
| 31 |
|
| 11 |
|
| 20 |
|
| — |
|
Long-term debt |
|
| 1,832 |
|
| — |
|
| 1,832 |
|
| — |
|
| 1,929 |
|
| — |
|
| 1,929 |
|
| — |
|
|
| 1,592 |
|
| — |
|
| 1,592 |
|
| — |
|
| 1,845 |
|
| — |
|
| 1,845 |
|
| — |
|
(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. |
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-term debt is estimated based on quotations of major securities dealers who are market makers in the securities. At SeptemberAs of
16
June 30, 2017,2018, the carrying value and fair value of the Company’s long-term debt were $1,731 million$1.5 billion and $1,832 million,$1.6 billion, respectively.
7.8. Share-Based Compensation
Stock Options: Under the Company’s stock incentive plan (“SIP”), stock options are granted at exercise prices that equal the market value of the underlying common stock on the date of grant. The options have a 10-year term and are exercisable upon vesting, which occurs 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 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.
The Company granted non-qualified options to purchase 215 thousand shares and 278 thousand shares and 329 thousand shares duringfor the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
| |||||||
|
| For the Nine Months Ended |
|
|
|
|
|
|
|
| ||
|
| September 30, |
|
| Six Months Ended June 30, |
| ||||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||
Expected life (in years) |
| 5.5 |
| 5.5 |
|
| 5.5 |
|
| 5.5 |
|
|
Risk-free interest rate |
| 1.93 | % | 1.36 | % |
| 2.5 | % |
| 1.9 | % |
|
Expected volatility |
| 22.50 | % | 23.40 | % |
| 19.8 | % |
| 22.5 | % |
|
Expected dividend yield |
| 1.68 | % | 1.80 | % |
| 1.8 | % |
| 1.7 | % |
|
The expected life of options represents the weighted 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 U.S. Treasury yield curve in effect at the grant date for the period corresponding to the expected life of the options. Expected volatility is based on historical volatilities of the Company’s common stock. Dividend yields are based on current dividend payments.
14
Stock option activity for the ninesix months ended SeptemberJune 30, 20172018 was as follows:
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|
|
|
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|
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| |
|
|
|
| Weighted |
|
|
|
|
|
| Number of Options (in thousands) |
| Weighted Average Exercise Price per Share |
| Average Remaining Contractual Term (Years) |
| Aggregate Intrinsic Value (in millions) |
| ||||
|
|
|
| Average |
| Average |
| Aggregate |
| |||||||||||||
|
| Number of |
| Exercise |
| Remaining |
| Intrinsic |
| |||||||||||||
|
| Options |
| Price per |
| Contractual |
| Value |
| |||||||||||||
|
| (in thousands) |
| Share |
| Term (Years) |
| (in millions) |
| |||||||||||||
Outstanding as of December 31, 2016 |
| 2,281 |
| $ | 61.39 |
| 5.93 |
| $ | 145 |
| |||||||||||
Outstanding as of December 31, 2017 |
| 2,095 |
| $ | 71.81 |
| 5.87 |
| $ | 142 |
| |||||||||||
Granted |
| 278 |
|
| 117.65 |
|
|
|
|
|
| 215 |
|
| 133.61 |
|
|
|
|
|
| |
Exercised |
| (299) |
|
| 46.10 |
|
|
|
|
|
| (122) |
|
| 45.44 |
|
|
|
|
|
| |
Cancelled |
| (21) |
|
| 87.50 |
|
|
|
|
|
| (11) |
|
| 82.53 |
|
|
|
|
|
| |
Outstanding as of September 30, 2017 |
| 2,239 |
| $ | 70.17 |
| 5.94 |
| $ | 113 |
| |||||||||||
Exercisable as of September 30, 2017 |
| 1,671 |
| $ | 58.04 |
| 5.33 |
| $ | 105 |
| |||||||||||
Outstanding as of June 30, 2018 |
| 2,177 |
| $ | 79.34 |
| 5.94 |
| $ | 75 |
| |||||||||||
Exercisable as of June 30, 2018 |
| 1,688 |
| $ | 67.14 |
| 5.37 |
| $ | 74 |
|
For the ninesix months ended SeptemberJune 30, 2017,2018, cash received from the exercise of stock options was $14$6 million. At SeptemberAs of June 30, 2017,2018, the total remaining unrecognized compensation cost related to non-vested stock options wastotaled $5 million, which willis expected to be amortized over a weighted averagethe weighted-average period of approximately 1.41.8 years.
Additional information pertaining to stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||
|
| September 30, |
| September 30, |
|
| June 30, |
| June 30, |
| ||||||||||||||||
(dollars in millions, except per share) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Weighted average grant date fair value of stock options granted (per share) |
| $ | — |
| $ | — |
| $ | 23.90 |
| $ | 18.73 |
|
| $ | — |
| $ | — |
| $ | 24.01 |
| $ | 23.90 |
|
Total intrinsic value of stock options exercised |
|
| 11 |
|
| 21 |
|
| 23 |
|
| 45 |
|
|
| 3 |
|
| 5 |
|
| 11 |
|
| 12 |
|
17
Restricted Stock Units: The Company has granted restricted stock units (“RSUs”) to certain key employees. The RSUs 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 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 aton the date of the grant.
The following table summarizes RSU activity for the ninesix months ended SeptemberJune 30, 2017:2018:
|
|
|
|
|
|
| |||||
|
|
|
| Weighted |
| ||||||
|
|
|
| Average |
| ||||||
|
| Number of |
| Fair Value |
|
|
|
|
|
| |
(RSUs in thousands) |
| RSUs |
| per Share |
|
| Number of RSUs |
| Weighted Average Fair Value per Share | ||
Non-vested as of December 31, 2016 |
| 429 |
| $ | 81.04 |
| |||||
Non-vested as of December 31, 2017 |
| 387 |
| $ | 100.13 | ||||||
Granted |
| 121 |
|
| 119.24 |
|
| 106 |
|
| 131.00 |
Vested |
| (148) |
|
| 64.94 |
|
| (124) |
|
| 83.37 |
Cancelled |
| (13) |
|
| 93.70 |
|
| (10) |
|
| 112.90 |
Non-vested as of September 30, 2017 |
| 389 |
| $ | 99.77 |
| |||||
Non-vested as of June 30, 2018 |
| 359 |
| $ | 114.57 |
At SeptemberAs of June 30, 2017,2018, the total remaining unrecognized compensation cost related to RSUs was $17$20 million, which will be amortized over a weighted average period of approximately 1.82.0 years.
Performance Shares: The Company has a long-term incentive plan for senior management in the form of performance shares. The ultimate payments for performance shares awarded and vested will be based solely on the Company’s stock performancetotal shareholder return as compared to the stock performancetotal shareholder return of its peer group. The number of shares that ultimately vest can range from zero to 200 percent of the awarded grant depending on the Company’s stock performancetotal shareholder return as compared to the stock performancetotal shareholder return of the peer group. The share award vesting will be calculated at the end of the three-year period and areis subject to approval by management and the Compensation Committee. 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.
15
For the ninesix months ended SeptemberJune 30, 2017,2018 the Company awarded 3827 thousand share unitsperformance shares at a weighted average fair value of $114.08$141.91 per share, unit.respectively.
The 20142015 performance share awardawards vested in the first quarter of 2017,2018, achieving a 200 percent pay out of the grant, or 11592 thousand total vested shares. There were nofour thousand performance share cancellations during the ninesix months ended SeptemberJune 30, 2017.2018.
As of SeptemberJune 30, 2017,2018, the unrecognized compensation cost related to these awards was $4 million, which will be amortized over the remaining requisite service periods of 1.81.9 years.
18
The following table summarizes the components of the Company’s share-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||
|
| September 30, |
| September 30, |
|
| June 30, |
| June 30, |
| ||||||||||||||||
(in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax compensation expense |
| $ | 2 |
| $ | 2 |
| $ | 6 |
| $ | 7 |
|
| $ | 2 |
| $ | 2 |
| $ | 3 |
| $ | 4 |
|
Income tax benefit |
|
| (1) |
|
| (1) |
|
| (2) |
|
| (3) |
|
|
| (1) |
|
| — |
|
| (1) |
|
| (1) |
|
Stock option expense, net of income taxes |
|
| 1 |
|
| 1 |
|
| 4 |
|
| 4 |
|
|
| 1 |
|
| 2 |
|
| 2 |
|
| 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax compensation expense |
|
| 4 |
|
| 3 |
|
| 10 |
|
| 9 |
|
|
| 3 |
|
| 3 |
|
| 6 |
|
| 6 |
|
Income tax benefit |
|
| (2) |
|
| (1) |
|
| (4) |
|
| (3) |
|
|
| — |
|
| (1) |
|
| (1) |
|
| (2) |
|
RSUs, net of income taxes |
|
| 2 |
|
| 2 |
|
| 6 |
|
| 6 |
|
|
| 3 |
|
| 2 |
|
| 5 |
|
| 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance shares and other share-based awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax compensation expense |
|
| 1 |
|
| 2 |
|
| 4 |
|
| 5 |
|
|
| 1 |
|
| 1 |
|
| 2 |
|
| 3 |
|
Income tax benefit |
|
| (1) |
|
| (1) |
|
| (2) |
|
| (2) |
|
|
| — |
|
| — |
|
| — |
|
| (1) |
|
Performance shares and other share-based compensation expense, net of income taxes |
|
| — |
|
| 1 |
|
| 2 |
|
| 3 |
|
|
| 1 |
|
| 1 |
|
| 2 |
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax compensation expense |
|
| 7 |
|
| 7 |
|
| 20 |
|
| 21 |
|
|
| 6 |
|
| 6 |
|
| 11 |
|
| 13 |
|
Income tax benefit |
|
| (4) |
|
| (3) |
|
| (8) |
|
| (8) |
|
|
| (1) |
|
| (1) |
|
| (2) |
|
| (4) |
|
Total share-based compensation expense, net of income taxes |
| $ | 3 |
| $ | 4 |
| $ | 12 |
| $ | 13 |
|
| $ | 5 |
| $ | 5 |
| $ | 9 |
| $ | 9 |
|
8.9. Net Periodic Pension and Postretirement Benefit Costs
For detailed information about the Company’s pension and postretirement benefit plans, please refer to Note 10 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
On January 1, 2018, the Company adopted ASU No. 2017-07, Compensation- Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. As a result, the interest cost, expected return on plan assets and amortization of actuarial loss components of net periodic benefit cost for the Company’s pension plans and other postretirement plans are presented as other, non-operating income on the Condensed Consolidated Statements of Income. There is no change to the presentation of the service cost component of net periodic benefit cost.
The following table sets forth the components of net periodic benefit cost of the U.S. and non-U.S. defined benefit pension plans for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| September 30, |
| September 30, |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||||||||||||||||||||||||||||||||||
|
| U.S. Plans |
| Non-U.S. Plans |
| U.S. Plans |
| Non-U.S. Plans |
|
| U.S. Plans |
| Non-U.S. Plans |
| U.S. Plans |
| Non-U.S. Plans |
| ||||||||||||||||||||||||||||||||
(in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||||||||||
Service cost |
| $ | 1 |
| $ | 2 |
| $ | 1 |
| $ | 1 |
| $ | 4 |
| $ | 5 |
| $ | 3 |
| $ | 2 |
|
| $ | 2 |
| $ | 2 |
| $ | 1 |
| $ | 1 |
| $ | 3 |
| $ | 3 |
| $ | 2 |
| $ | 2 |
|
Interest cost |
|
| 3 |
|
| 3 |
|
| 3 |
|
| 3 |
|
| 9 |
|
| 10 |
|
| 8 |
|
| 8 |
|
|
| 3 |
|
| 3 |
|
| 2 |
|
| 3 |
|
| 6 |
|
| 6 |
|
| 5 |
|
| 5 |
|
Expected return on plan assets |
|
| (5) |
|
| (5) |
|
| (3) |
|
| (3) |
|
| (15) |
|
| (15) |
|
| (8) |
|
| (8) |
|
|
| (5) |
|
| (5) |
|
| (3) |
|
| (2) |
|
| (10) |
|
| (10) |
|
| (5) |
|
| (5) |
|
Amortization of actuarial loss |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
|
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
|
Settlement loss |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2 |
| |||||||||||||||||||||||||
Net periodic benefit cost |
| $ | (1) |
| $ | — |
| $ | 1 |
| $ | 1 |
| $ | (2) |
| $ | — |
| $ | 4 |
| $ | 5 |
|
| $ | — |
| $ | — |
| $ | 1 |
| $ | 2 |
| $ | (1) |
| $ | (1) |
| $ | 3 |
| $ | 3 |
|
The Company currently anticipates that it will make approximately $5 million in cash contributions to its pension plans in 2017,2018, consisting of $4$3 million to its non-U.S. pension plans and $1$2 million to its U.S. pension plans. For the ninesix months ended June 30, 2018,cash contributions of approximately $1 million were made to the non-U.S. plans and less than $1 million to the U.S. plans.
1619
months ended September 30, 2017,cash contributions of approximately $3 million were made to the non-U.S. plans and $1 million to the U.S. plans.
The following table sets forth the components of net postretirement benefit cost for the periods presented:
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| September 30, |
| September 30, |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||||||||||
(in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Service cost |
| $ | 1 |
| $ | — |
| $ | 1 |
| $ | 1 |
| |||||||||||||
Service Cost |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| |||||||||||||
Interest cost |
| — |
| 1 |
| 2 |
| 2 |
|
| 1 |
| 1 |
| 2 |
| 2 |
| ||||||||
Amortization of prior service credit |
|
| — |
|
| (1) |
|
| (2) |
|
| (3) |
|
|
| — |
|
| (1) |
|
| (1) |
|
| (2) |
|
Net periodic benefit cost |
| $ | 1 |
| $ | — |
| $ | 1 |
| $ | — |
|
| $ | 1 |
| $ | — |
| $ | 1 |
| $ | — |
|
9.10. Earnings per Common Share
The following table provides the computation of basic and diluted earnings per common share ("EPS") for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| Three Months Ended September 30, 2017 |
| Three Months Ended September 30, 2016 |
| |||||||||||||||||||||||||||||
|
| Net Income |
|
|
|
|
|
| Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Available |
| Weighted |
| Per Share |
| Available |
| Weighted |
| Per Share |
|
| Three Months Ended June 30, 2018 |
| Three Months Ended June 30, 2017 |
| ||||||||||||||||
(in millions, except per share amounts) |
| to Ingredion |
| Average Shares |
| Amount |
| to Ingredion |
| Average Shares |
| Amount |
|
| Net Income Available to Ingredion |
| Weighted Average Shares |
| Per Share Amount |
| Net Income Available to Ingredion |
| Weighted Average Shares |
| Per Share Amount |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Basic EPS |
| $ | 166 |
| 71.9 |
| $ | 2.31 |
| $ | 143 |
| 72.5 |
| $ | 1.98 |
|
| $ | 114 |
| 71.9 |
| $ | 1.59 |
| $ | 130 |
| 71.8 |
| $ | 1.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental shares from assumed exercise of dilutive stock options and vesting of dilutive RSUs and other awards |
|
|
|
| 1.4 |
|
|
|
|
|
|
| 1.8 |
|
|
|
|
|
|
|
| 0.9 |
|
|
|
|
|
|
| 1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Diluted EPS |
| $ | 166 |
| 73.3 |
| $ | 2.26 |
| $ | 143 |
| 74.3 |
| $ | 1.93 |
|
| $ | 114 |
| 72.8 |
| $ | 1.57 |
| $ | 130 |
| 73.2 |
| $ | 1.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| Nine Months Ended September 30, 2017 |
| Nine Months Ended September 30, 2016 |
| |||||||||||||||||||||||||||||
|
| Net Income |
|
|
|
|
|
| Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Available |
| Weighted |
| Per Share |
| Available |
| Weighted |
| Per Share |
|
| Six Months Ended June 30, 2018 |
| Six Months Ended June 30, 2017 |
| ||||||||||||||||
(in millions, except per share amounts) |
| to Ingredion |
| Average Shares |
| Amount |
| to Ingredion |
| Average Shares |
| Amount |
|
| Net Income Available to Ingredion |
| Weighted Average Shares |
| Per Share Amount |
| Net Income Available to Ingredion |
| Weighted Average Shares |
| Per Share Amount |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Basic EPS |
| $ | 420 |
| 72.0 |
| $ | 5.83 |
| $ | 391 |
| 72.2 |
| $ | 5.42 |
|
| $ | 254 |
| 72.1 |
| $ | 3.52 |
| $ | 254 |
| 72.0 |
| $ | 3.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental shares from assumed exercise of dilutive stock options and vesting of dilutive RSUs and other awards |
|
|
|
| 1.4 |
|
|
|
|
|
|
| 1.8 |
|
|
|
|
|
|
|
| 1.1 |
|
|
|
|
|
|
| 1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Diluted EPS |
| $ | 420 |
| 73.4 |
| $ | 5.72 |
| $ | 391 |
| 74.0 |
| $ | 5.29 |
|
| $ | 254 |
| 73.2 |
| $ | 3.47 |
| $ | 254 |
| 73.4 |
| $ | 3.46 |
|
For the three and ninesix months ended SeptemberJune 30, 2017,2018, approximately 0.30.6 million and 0.3 million share-based awards of common stock, respectively, were excluded from the calculation of diluted EPS as the impact of their inclusion would have been anti-dilutive. For both the three and ninesix months ended SeptemberJune 30, 2016, the number of2017, approximately 0.3 million share-based awards of common stock were excluded from the calculation of diluted EPS was not material.as the impact of their inclusion would have been anti-dilutive.
17
10.11. Inventories
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| As of September 30, |
| As of December 31, |
|
| As of |
| As of |
| ||||
(in millions) |
| 2017 |
| 2016 |
|
| June 30, 2018 |
| December 31, 2017 |
| ||||
Finished and in process |
| $ | 497 |
| $ | 478 |
|
| $ | 506 |
| $ | 495 |
|
Raw materials |
|
| 274 |
|
| 260 |
|
|
| 309 |
|
| 278 |
|
Manufacturing supplies and other |
|
| 54 |
|
| 51 |
|
|
| 51 |
|
| 50 |
|
Total inventories |
| $ | 825 |
| $ | 789 |
|
| $ | 866 |
| $ | 823 |
|
11. Debt
As of September 30, 2017 and December 31, 2016, the Company’s total debt consisted of the following:
|
|
|
|
|
|
|
|
|
| As of September 30, |
| As of December 31, |
| ||
(in millions) |
| 2017 |
| 2016 |
| ||
3.2% senior notes due October 1, 2026 |
| $ | 496 |
| $ | 496 |
|
4.625% senior notes due November 1, 2020 |
|
| 398 |
|
| 398 |
|
1.8% senior notes due September 25, 2017 |
|
| — |
|
| 299 |
|
6.625% senior notes due April 15, 2037 |
|
| 254 |
|
| 254 |
|
6.0% senior notes due April 15, 2017 |
|
| — |
|
| 200 |
|
5.62% senior notes due March 25, 2020 |
|
| 200 |
|
| 200 |
|
Term loan credit agreement due April 25, 2019 |
|
| 380 |
|
| — |
|
Revolving credit facility |
|
| — |
|
| — |
|
Fair value adjustment related to hedged fixed rate debt instruments |
|
| 3 |
|
| 3 |
|
Long-term debt |
| $ | 1,731 |
| $ | 1,850 |
|
Short-term borrowings |
|
| 153 |
|
| 106 |
|
Total debt |
| $ | 1,884 |
| $ | 1,956 |
|
The $200 million of 6.0 percent senior notes due April 15, 2017 were refinanced with borrowings under the revolving credit facility in April 2017.
On August 18, 2017, the Company entered into a new Term Loan Credit Agreement (“Term Loan”) to establish a senior unsecured term loan credit facility. Under the Term Loan, the Company is allowed three borrowings in an amount of up to $500 million total. The Term Loan matures 18 months from the date of the final borrowing. As of September 30, 2017, the Company had initiated two borrowings under the Term Loan totaling $380 million. The proceeds were used to refinance $300 million of 1.8 percent senior notes due September 25, 2017 and pay down borrowings outstanding on the revolving credit facility. On October 25, 2017, the Company initiated its third and final borrowing under the Term Loan of $40 million, bringing the total outstanding Term Loan to $420 million, due April 25, 2019.
All borrowings under the term loan 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. The Term Loan Credit Agreement contains customary representations, warranties, covenants, events of default, terms and conditions, including limitations on liens, incurrence of debt, mergers and significant asset dispositions. The Company must also comply with a leverage ratio and interest coverage ratio. The occurrence of an event of default under the 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.
1820
12.Debt
As of June 30, 2018 and December 31, 2017, the Company’s total debt consisted of the following:
|
|
|
|
|
|
|
|
|
| As of |
| As of |
| ||
(in millions) |
| June 30, 2018 |
| December 31, 2017 |
| ||
3.2% senior notes due October 1, 2026 |
| $ | 496 |
| $ | 496 |
|
4.625% senior notes due November 1, 2020 |
|
| 399 |
|
| 398 |
|
6.625% senior notes due April 15, 2037 |
|
| 254 |
|
| 254 |
|
5.62% senior notes due March 25, 2020 |
|
| 200 |
|
| 200 |
|
Term loan credit agreement due April 25, 2019 |
|
| 165 |
|
| 395 |
|
Revolving credit facility |
|
| 19 |
|
| — |
|
Fair value adjustment related to hedged fixed rate debt instruments |
|
| (3) |
|
| 1 |
|
Long-term debt |
|
| 1,530 |
|
| 1,744 |
|
Short-term borrowings |
|
| 133 |
|
| 120 |
|
Total debt |
| $ | 1,663 |
| $ | 1,864 |
|
The Company’s long-term debt as of June 30, 2018 includes the Term Loan Credit Agreement (“Term Loan”) of $165 million that matures on April 25, 2019. This borrowing is included in the long-term debt as the Company has the ability and intent to refinance it on a long-term basis prior to the maturity date. The Company paid $230 million towards the Term Loan in the six months ended June 30, 2018.
13. Income Taxes
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 and the imposition of a U.S. tax on its global intangible low-taxed income (“GILTI”). The TCJA also provides for a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017, and eliminates the tax on dividends from the Company’s 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 U.S. Generally Accepted Accounting Principles (“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.
The Company has calculated what it believes is a reasonable estimate of the impact of the TCJA in accordance with SAB 118 and its understanding of the TCJA, including published guidance as of the date of this filing. In the fourth quarter of 2017, the Company recorded $23 million of provisional income tax expense related to the TCJA. The provisional amount of $23 million is composed of the following items:
|
|
|
|
(in millions) |
|
| |
One-time transition tax |
| $ | 21 |
Remeasurement of deferred tax assets and liabilities |
|
| (38) |
Net impact of provision for taxes on unremitted earnings |
|
| 33 |
Other items, net |
|
| 7 |
Net impact of the TCJA on 2017 income tax expense |
| $ | 23 |
The Company may update its estimate in 2018 as additional information, including guidance from federal and state regulatory agencies, becomes available and the Company finalizes its computations, which are complex and subject to interpretation. Any adjustment to these provisional tax amounts will be recorded in the quarter of 2018 in which its analysis is completed. The Company has not made any adjustments to the provisional tax amounts for the three and six months ended June 30, 2018.
Because of the complexity of the new GILTI rules, the Company is continuing to evaluate this provision of the TCJA for the application of ASC 740. Under GAAP, the Company is allowed to make an accounting policy choice of either treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when
21
incurred (the “period cost method”) or factoring such amounts into its measurement of its deferred taxes (the “deferred method”). The Company has not made any adjustments related to potential GILTI tax in its financial statements, as it has not made a policy decision regarding whether to record deferred taxes on GILTI.
14. Accumulated Other Comprehensive Loss
The following is a summary of net changes in accumulated other comprehensive loss by component and net of tax for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred |
|
|
|
| Unrealized |
| Accumulated |
| |||
|
| Cumulative |
| Gain (Loss) |
| Pension and |
| Gain |
| Other |
| |||||
|
| Translation |
| on Hedging |
| Postretirement |
| on |
| Comprehensive |
| |||||
(in millions) |
| Adjustment |
| Activities |
| Adjustment |
| Investment |
| Loss |
| |||||
Balance, December 31, 2016 |
| $ | (1,008) |
| $ | (7) |
| $ | (56) |
| $ | — |
| $ | (1,071) |
|
Other comprehensive income (loss) before reclassification adjustments |
|
| 62 |
|
| (4) |
|
| 1 |
|
| 1 |
|
| 60 |
|
Amount reclassified from accumulated OCI |
|
| — |
|
| 1 |
|
| (1) |
|
| — |
|
| — |
|
Tax benefit |
|
| — |
|
| 2 |
|
| — |
|
| — |
|
| 2 |
|
Net other comprehensive income (loss) |
|
| 62 |
|
| (1) |
|
| — |
|
| 1 |
|
| 62 |
|
Balance, September 30, 2017 |
| $ | (946) |
| $ | (8) |
| $ | (56) |
| $ | 1 |
| $ | (1,009) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2017 |
| $ | (951) |
| $ | (13) |
| $ | (51) |
| $ | 2 |
| $ | (1,013) |
|
Other comprehensive (loss) income before reclassification adjustments |
|
| (96) |
|
| 1 |
|
| (1) |
|
| 1 |
|
| (95) |
|
Amount reclassified from accumulated OCI |
|
| — |
|
| 3 |
|
| — |
|
| — |
|
| 3 |
|
Tax provision |
|
| — |
|
| (1) |
|
| — |
|
| — |
|
| (1) |
|
Net other comprehensive (loss) income |
|
| (96) |
|
| 3 |
|
| (1) |
|
| 1 |
|
| (93) |
|
Balance, June 30, 2018 |
| $ | (1,047) |
| $ | (10) |
| $ | (52) |
| $ | 3 |
| $ | (1,106) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred |
|
|
|
| Unrealized |
| Accumulated |
| |||
|
| Cumulative |
| Gain (Loss) |
| Pension and |
| Loss |
| Other |
| |||||
|
| Translation |
| on Hedging |
| Postretirement |
| on |
| Comprehensive |
| |||||
(in millions) |
| Adjustment |
| Activities |
| Adjustment |
| Investment |
| Loss |
| |||||
Balance, December 31, 2015 |
| $ | (1,025) |
| $ | (29) |
| $ | (47) |
| $ | (1) |
| $ | (1,102) |
|
Other comprehensive income (loss) before reclassification adjustments |
|
| 78 |
|
| (24) |
|
| (5) |
|
| — |
|
| 49 |
|
Amount reclassified from accumulated OCI |
|
| — |
|
| 27 |
|
| 1 |
|
| — |
|
| 28 |
|
Tax benefit |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| 1 |
|
Net other comprehensive income (loss) |
|
| 78 |
|
| 3 |
|
| (3) |
|
| — |
|
| 78 |
|
Balance, September 30, 2016 |
| $ | (947) |
| $ | (26) |
| $ | (50) |
| $ | (1) |
| $ | (1,024) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 before reclassification adjustments |
|
| 32 |
|
| 12 |
|
| 1 |
|
| 1 |
|
| 46 |
|
Amount reclassified from accumulated OCI |
|
| — |
|
| 2 |
|
| (1) |
|
| — |
|
| 1 |
|
Tax provision |
|
| — |
|
| (5) |
|
| — |
|
| — |
|
| (5) |
|
Net other comprehensive income |
|
| 32 |
|
| 9 |
|
| — |
|
| 1 |
|
| 42 |
|
Balance, June 30, 2017 |
| $ | (976) |
| $ | 2 |
| $ | (56) |
| $ | 1 |
| $ | (1,029) |
|
The following table provides detail pertaining to reclassifications from AOCI into net income for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount |
| Amount |
|
|
|
| Three Months Ended |
| Six Months Ended |
| Affected Line Item in |
| ||||||||||||||||
|
| Reclassified from |
| Reclassified from |
|
|
|
| June 30, |
| June 30, |
| Condensed Consolidated |
| ||||||||||||||||
|
| AOCI |
| AOCI |
|
|
| |||||||||||||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
| Affected Line Item in |
| |||||||||||||||||||||||
Details about AOCI Components |
| September 30, |
| September 30, |
| Condensed Consolidated |
| |||||||||||||||||||||||
(in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| Statements of Income |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| Statements of Income |
| ||||||||
Gains (losses) on cash-flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Gains (losses) on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Commodity contracts |
| $ | — |
| $ | (6) |
| $ | (1) |
| $ | (25) |
| Cost of sales |
|
| $ | 2 |
| $ | 2 |
| $ | (3) |
| $ | (1) |
| Cost of sales |
|
Foreign currency contracts |
|
| 1 |
|
| — |
|
| 1 |
|
| (1) |
| Net sales/Cost of sales |
|
|
| — |
|
| — |
|
| 1 |
|
| — |
| Net sales/cost of sales |
|
Interest rate contracts |
|
| — |
|
| — |
|
| (1) |
|
| (1) |
| Financing costs, net |
|
|
| (1) |
|
| — |
|
| (1) |
|
| (1) |
| Financing costs, net |
|
Gains (losses) related to pension and other postretirement obligations |
|
| — |
|
| — |
|
| 1 |
|
| (1) |
| (a) |
| |||||||||||||||
Gains related to pension and other postretirement obligations |
|
| — |
|
| 1 |
|
| — |
|
| 1 |
|
|
| |||||||||||||||
Total before-tax reclassifications |
| $ | 1 |
| $ | (6) |
| $ | — |
| $ | (28) |
|
|
|
| $ | 1 |
| $ | 3 |
| $ | (3) |
| $ | (1) |
|
|
|
Tax (provision) benefit |
|
| (1) |
|
| 2 |
|
| — |
|
| 9 |
|
|
| |||||||||||||||
Tax provision |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
|
|
| |||||||||||||||
Total after-tax reclassifications |
| $ | — |
| $ | (4) |
| $ | — |
| $ | (19) |
|
|
|
| $ | 1 |
| $ | 3 |
| $ | (2) |
| $ | — |
|
|
|
|
|
1922
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are a major supplier of high-quality food and industrial ingredient solutions to customers around the world. We have 44 manufacturing plants located in North America, South America, Asia 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 brewingnutrition 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 ingredient solutions for our customers. The foundation of our Strategic Blueprintstrategy is operating 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 with 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 increasedenhance shareholder value.
We had a solid third quarterNet sales grew in the three and ninesix months ended SeptemberJune 30, 2018 compared to 2017, aswhile operating income and net income declined versus the three and dilutedsix months ended June 30, 2017. Our decline in earnings per common share grew from the comparable 2016 periods. Our earnings growth was driven principally by continued strong operating resultsperformance in our North America segment during the year,due to higher production and freight costs and lower sweetener and industrial starch demand in U.S./Canada. In addition, lower Asia Pacific operating income due primarily to higher tapioca costs was partially offset by lower earningsoperating income growth in our South America segment due to continued difficult macroeconomic conditions and increased costs in Argentina. The Company implemented an organizational restructuring effort in Argentina during the first quarter of 2017 to achieve a more competitive cost position in the region. We notified the local labor union of a planned reduction in workforce, which resulted in a strike by the labor union and an interruption of manufacturing activities during the second quarter of 2017. We finalized a new labor agreement with the labor union in the second quarter, ending the strike on June 1, 2017. The Company recorded total pre-tax employee-related severance and other costs in Argentina of $17 million for the nine months ended September 30, 2017, related to the workforce reduction. Operating income also grew in our EMEA and Asia Pacific segments.
During the second quarter of 2017,In July 2018, the Company announced a Finance Transformation initiative$125 million savings target for its Cost Smart program, designed to improve profitability, further streamline its global business, and deliver increased value to shareholders. The Company is setting forth 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.
Additionally, on July 11, 2018, the Board of Directors authorized the cessation of wet-milling at the Stockton, California plant and the establishment of a shipping distribution station at that facility by the end of 2018, as part of the Cost Smart cost of sales program. We expect the cessation of wet-milling at the Stockton plant to result in up to $53 million of pre-tax restructuring-related charges in 2018. We expect fixed asset accelerated depreciation of $38 million and mechanical stores write-downs of up to $8 million to be incurred in the North America forthird and fourth quarters of 2018 as the U.S. and Canada businesses to strengthen organizational capabilities and drive efficiencies to support the growth strategy of the Company. The Company recorded $4 million ofmanufacturing operations are wound down. Estimated pre-tax, employee-related severance and other restructuring costs duringassociated with the third quarterclosure are estimated to be $7 million, including employee-related severance of 2017 related to this initiative. We expect to incur between $3 million and $5other closing costs of $4 million. There were no restructuring charges related to the Stockton plant for the three or six months ended June 30, 2018.
During the second quarter of 2018, we recorded $8 million of additional employee-relatedpre-tax restructuring charges. Employee-related severance and other costs inassociated with the fourth quarter of 2017 and between $1 million andCost Smart SG&A program were $6 million. We also recorded $2 million in 2018other restructuring related costs related to thisour Finance Transformation initiative.
Our cash provided by operating activities decreasedincreased to $524$352 million for the ninesix months ended SeptemberJune 30, 20172018 from $542$302 million in the year-earlier period, driven by an increaseincluding one-time net tax receipts of cash outflow in$89 million, included within working capital changes, primarily due toas a result of the outflow in accounts payable2017 Tax Cuts and accrued liabilities forJobs Act and the $63 million payment made to the Internal Revenue Service (“IRS”) in the third quarter of 2017 to complete the double taxation settlement between the U.S. and Canada. This outflow was partially offset by increased earnings in the period. U.S.-Canada tax settlement.Our cash used for financing activities increasedwas $424 million during the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to debt repayments on the Term Loan Credit Agreement (“Term Loan”) of approximately $230 million during the first quarter of 2018 and the repurchase of approximately one1.25 million shares of our common stock in open market transactions for $123$141 million during the firstsecond quarter of 2017. During the second and third quarters, we also refinanced a total of $500 million of senior notes with borrowings under our revolving credit facility and a new term loan entered into during the third quarter. 2018.
On March 9, 2017,Looking ahead, in North America, we expect full year operating income to be lower than the Company completed its acquisition of Sun Flour Industry Co., Ltd. (“Sun Flour”)prior year given higher freight and production costs. In South America, we expect operating income to improve over the prior year driven by volume recovery and favorable raw material prices. We expect operating income to be flat to down in Thailand for $18 million. Upon closing, the Company paid $13 million in cash and recorded $5 million in accrued liabilities for deferred paymentsAsia Pacific due to the previous owner. The acquisition of Sun Flour adds a fourth manufacturing facility to our operationsprolonged higher tapioca costs. We expect operating income growth in Thailand. Sun Flour produces rice-based ingredients used primarilyEMEA in the food industry. This transaction will enhance our global supply chain and leverage other capital investments that we have made in Thailand to grow our specialty ingredients and service customers around the world. The acquisition did not have a material impact on our financial condition, results of operations or cash flows in the third quarter of 2017.2018.
2023
Looking ahead, we anticipate that our full year 2017 operating income and net income will grow compared to 2016. In North America, we expect full year operating income to increase driven by improved product mix and margins. In South America, we believe that full year operating income will be down compared to 2016 driven by temporary higher-than-normal costs related to the interruption of manufacturing activities in Argentina and the restructuring charges incurred to improve the cost position of the operation in Argentina. We will continue to focus on network optimization and cost improvement in this segment for the remainder of the year. In the longer term, we believe that the underlying business demographics for our South American segment are positive. We expect full-year operating income to grow in EMEA principally driven by improved price/product mix from our specialty ingredient product portfolio, volume growth and effective cost control. In Asia Pacific, we expect full-year operating income to increase, driven by volume growth and effective cost control.
Results of Operations
We have significant operations in four reporting segments: North America, South America, Asia 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 U.S. dollars at the applicable average exchange rates for the period. Fluctuations in foreign currency exchange rates affect the U.S. dollar amounts of our foreign subsidiaries’ revenues and expenses. The impact of foreign currency exchange rate changes, where significant, is provided below.
We acquired Shandong Huanong Specialty Corn DevelopmentSun Flour Industry Co., Ltd. (“Shandong Huanong”), TIC Gums Incorporated (“TIC Gums”Sun Flour”) and Sun Flour on November 29, 2016, December 29, 2016 and March 9, 2017, respectively.2017. The results of the acquired businessesbusiness are included in our consolidated financial results from the respective acquisition datesdate forward. While we identify fluctuations due to the acquisitions,acquisition, our discussion below also addresses results of operations absent the impact of the acquisitionsacquisition and the results of the acquired businesses,business, where appropriate, to provide a more comparable and meaningful analysis.
For the Three and Nine Months Ended SeptemberJune 30, 20172018
With Comparatives for the Three and Nine Months Ended SeptemberJune 30, 20162017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, |
| Favorable (Unfavorable) |
| Favorable (Unfavorable) |
| |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage |
| |||
Net sales |
| $ | 1,496 |
| $ | 1,457 |
| $ | 39 |
| 3 | % |
Cost of sales |
|
| 1,136 |
|
| 1,084 |
|
| (52) |
| (5) | % |
Gross profit |
|
| 360 |
|
| 373 |
|
| (13) |
| (3) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
| 161 |
|
| 158 |
|
| (3) |
| (2) | % |
Other income, net |
|
| (2) |
|
| (1) |
|
| 1 |
| 100 | % |
Restructuring/impairment charges |
|
| 8 |
|
| 6 |
|
| (2) |
| (33) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 193 |
|
| 210 |
|
| (17) |
| (8) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs, net |
|
| 25 |
|
| 20 |
|
| (5) |
| (25) | % |
Other, non-operating income |
|
| (1) |
|
| (1) |
|
| — |
| — | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
| 169 |
|
| 191 |
|
| (22) |
| (12) | % |
Provision for income taxes |
|
| 53 |
|
| 58 |
|
| 5 |
| 9 | % |
Net income |
|
| 116 |
|
| 133 |
|
| (17) |
| (13) | % |
Less: Net income attributable to non-controlling interests |
|
| 2 |
|
| 3 |
|
| 1 |
| 33 | % |
Net income attributable to Ingredion |
| $ | 114 |
| $ | 130 |
| $ | (16) |
| (12) | % |
Net Incomeincome attributable to Ingredion. Net income attributable to Ingredion for the third quarter of 2017 increasedthree months ended June 30, 2018 decreased by 1612 percent to $166$114 million or $2.26 per diluted common share, from $143$130 million or $1.93 per diluted common share, a year ago. Net income for the ninethree months ended SeptemberJune 30, 2017 increased by 7 percent to $420 million, or $5.72 per diluted common share, from $391 million, or $5.29 per diluted common share, in the nine months ended September 30, 2016.2017.
Results for the thirdsecond quarter of 20172018 include a tax benefit of $10 million ($0.14 per diluted common share) due to a deductible foreign exchange loss resulting from the tax settlement between the U.S. and Canada, partially offset by after-tax costs of $5 million ($0.07 per diluted common share) of net restructuring costs primarily associated with theour Cost Smart SG&A program and Finance Transformation initiative and $1$2 million ($0.01 per diluted common share)of interest penalty associated with the integration of acquired operations.final tax settlement between the U.S. and Canada. Results for the thirdsecond quarter of 2016 include after-tax costs of $2 million ($0.02 per diluted common share) consisting of employee-related severance and other costs associated with the execution of global information technology (“IT”) outsourcing contracts.
Results for the nine months ended September 30, 2017 include after-tax costs of $21$5 million ($0.29 per diluted common share) of net restructuring costs primarily associated with our restructuring effort in Argentina and $3 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.
Net sales. Our net sales for the second quarter of 2018 of $1.5 billion increased by 3 percent compared to the three months ended June 30, 2017. The increase was driven primarily by volume growth of 3 percent and increased price/product mix of 1 percentage point, offset by unfavorable currency translation of 1 percentage point.
24
Cost of sales. Cost of sales was $1.1 billion for the three months ended June 30, 2018 and 2017. Our gross profit margin was 24 percent for the three months ended June 30, 2018, down from 26 percent for the three months ended June 30, 2017. Gross profit margin decreased primarily due to higher freight and production costs in our North America segment and higher tapioca costs in Thailand.
Operating expenses. Operating expenses for the second quarter of 2018 increased to $161 million from $158 million last year. This increase was primarily driven by higher employee costs. Operating expenses, as a percentage of net sales were flat at 11 percent for the three months ended June 30, 2018 and 2017.
Financing costs, net. Financing costs for the three months ended June 30, 2018 increased to $25 million from $20 million for the three months ended June 30, 2017, primarily due to foreign exchange losses.
Provision for income taxes. The effective tax rate was 31.4 percent for the three months ended June 30, 2018. We use the U.S. Dollar as the functional currency for our subsidiaries in Mexico. In the three months ended June 30, 2018, the effective tax rate was increased by 2.8 percent due to the devaluation of the Mexican Peso versus the U.S. Dollar. In addition, we increased the valuation allowance on the net deferred tax assets of a foreign subsidiary. As a result, in the three months ended June 30, 2018, the effective tax rate was increased by 0.6 percent.
The above unfavorable items were offset by the provisions of the Tax Cuts and Jobs Act (“TCJA”) enacted on December 22, 2017. The TCJA introduced numerous changes in the U.S. federal tax laws. Changes that have a significant impact on our effective tax rate are a reduction in the U.S. corporate tax rate from 35 percent to 21 percent; elimination of federal income tax on dividends from our foreign subsidiaries, and the imposition of a U.S. tax on our global intangible low-taxed income (“GILTI”). The TCJA also eliminated the domestic production activities deduction for years beginning after December 31, 2017.
The effective income tax rate was 30.4 percent for the three months ended June 30, 2017. Our effective income tax rate for the three months ended June 30, 2017 was reduced by 0.9 percent due to the revaluation of the Mexican Peso versus the U.S. Dollar. In addition, we increased the valuation allowance on the net deferred tax assets of a foreign subsidiary. As a result, in the three months ended June 30, 2017, the effective tax rate was increased by 2.8 percent. The above tax items were offset by individually insignificant items.
Segment Results
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, |
| Favorable (Unfavorable) |
| Favorable (Unfavorable) |
| |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage |
| |||
Net sales to unaffiliated customers |
| $ | 916 |
| $ | 905 |
| $ | 11 |
| 1 | % |
Operating income |
|
| 150 |
|
| 180 |
|
| (30) |
| (17) | % |
Net sales. Our increase in net sales of 1 percent for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, was primarily driven by a 1 percent volume increase and 1 percent favorable foreign currency offset by 1 percentage point unfavorable impact in price/product mix driven by increased freight costs.
Operating income.Our decrease in operating income of $30 million for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, was primarily driven by increased production and freight costs and lower U.S./Canada sweetener and industrial starch demand.
South America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, |
| Favorable (Unfavorable) |
| Favorable (Unfavorable) |
| |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage |
| |||
Net sales to unaffiliated customers |
| $ | 232 |
| $ | 228 |
| $ | 4 |
| 2 | % |
Operating income |
|
| 20 |
|
| 4 |
|
| 16 |
| 400 | % |
Net sales. Our increase in net sales of 2 percent for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, was primarily driven by a 8 percentage point favorable impact from price/product mix
25
driven by pass through of foreign currency devaluations and 8 percent volume growth, offset by 14 percent unfavorable foreign currency driven by the weaker Argentine peso and Brazilian real.
Operating income.Our increase in operating income of $16 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, was primarily driven by volume growth, improved operational efficiencies, the lapping of our 2017 Argentina manufacturing optimization project and a modestly improving macroeconomic environment.
Asia Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, |
| Favorable (Unfavorable) |
| Favorable (Unfavorable) |
| |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage |
| |||
Net sales to unaffiliated customers |
| $ | 201 |
| $ | 187 |
| $ | 14 |
| 7 | % |
Operating income |
|
| 27 |
|
| 30 |
|
| (3) |
| (10) | % |
Net sales. Our increase in net sales of 7 percent for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, was primarily driven by favorable currency translation of 4 percentage points, a 2 percentage point increase in price/product mix due to core customer mix diversification and 1 percent volume growth.
Operating income. Our decrease in operating income of $3 million for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, was primarily driven by a lag in the pass through of higher tapioca costs partially offset by volume growth and favorable foreign exchange rates.
EMEA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, |
| Favorable (Unfavorable) |
| Favorable (Unfavorable) |
| |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage |
| |||
Net sales to unaffiliated customers |
| $ | 147 |
| $ | 137 |
| $ | 10 |
| 7 | % |
Operating income |
|
| 29 |
|
| 29 |
|
| — |
| — | % |
Net sales. Our increase in net sales of 7 percent for the three months ended June 30, 2018 compared to the three months June 30, 2017, was primarily driven by a volume increase of 9 percent offset by a 1 percentage point decrease due to price/product mix and an unfavorable currency translation of 1 percentage point.
Operating income. Our operating income remained flat for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, as a result of volume growth being offset by unfavorable currency translation driven by the weaker Pakistani rupee and higher raw material costs in Pakistan.
26
For the Six Months Ended June 30, 2018
With Comparatives for the Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
| Favorable (Unfavorable) |
| Favorable (Unfavorable) |
| |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage |
| |||
Net sales |
| $ | 2,965 |
| $ | 2,910 |
| $ | 55 |
| 2 | % |
Cost of sales |
|
| 2,251 |
|
| 2,186 |
|
| (65) |
| (3) | % |
Gross profit |
|
| 714 |
|
| 724 |
|
| (10) |
| (1) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
| 317 |
|
| 308 |
|
| (9) |
| (3) | % |
Other income, net |
|
| (4) |
|
| (3) |
|
| 1 |
| 33 | % |
Restructuring/impairment charges |
|
| 11 |
|
| 16 |
|
| 5 |
| 31 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 390 |
|
| 403 |
|
| (13) |
| (3) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs, net |
|
| 41 |
|
| 41 |
|
| — |
| — | % |
Other, non-operating income |
|
| (2) |
|
| (3) |
|
| (1) |
| (33) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
| 351 |
|
| 365 |
|
| (14) |
| (4) | % |
Provision for income taxes |
|
| 92 |
|
| 105 |
|
| 13 |
| 12 | % |
Net income |
|
| 259 |
|
| 260 |
|
| (1) |
| — | % |
Less: Net income attributable to non-controlling interests |
|
| 5 |
|
| 6 |
|
| 1 |
| 17 | % |
Net income attributable to Ingredion |
| $ | 254 |
| $ | 254 |
| $ | — |
| — | % |
Net income attributable to Ingredion. Net income attributable to Ingredion for the six months ended June 30, 2018 remained flat at $254 million compared to the six months ended June 30, 2017.
Our results for the six months ended June 30, 2018 include after-tax restructuring charges of $8 million consisting of $4 million of employee-related severance and other costs associated with the Cost Smart SG&A program, $3 million of other restructuring costs related to the Finance Transformation initiative and $1 million of costs related to our leaf extraction process in Brazil. Results for the six months ended June 30, 2017 include after-tax costs of $16 million of net restructuring costs primarily associated with our restructuring effort in Argentina, $6 million ($0.08 per diluted common share) 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 $2$1 million ($0.03 per diluted common share) associated with the integration of acquired operations, partially offsetoperations.
Net sales. Our increase in net sales of 2 percent for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, was primarily driven by volume growth of 2 percent.
Cost of sales. Cost of sales for the six months ended June 30, 2018 increased to $2.3 billion from $2.2 billion for the six months ended June 30, 2017. Our gross profit margin was 24 percent for the six months ended June 30, 2018, down from 25 percent compared to the six months ended June 30, 2017. The gross profit margin decreased primarily due to higher freight and production costs in our North America segment and higher tapioca costs in Thailand.
Operating expenses. Our operating expenses increased 3 percent to $317 million for the six months ended June 30, 2018 as compared to $308 million for the six months ended June 30, 2017. The increase was primarily driven by higher employee costs. Operating expenses, as a tax benefitpercentage of $10 million ($0.14 per diluted common share)net sales, were flat at 11 percent for the six months ended June 30, 2018 and 2017.
Financing costs, net. Financing costs for the six months ended June 30, 2018 remained flat compared to the six months ended June 30, 2017, primarily due to a deductibledecrease in interest expense as a result of lower debt balances offset by foreign exchange loss resulting from the tax settlement between the U.S. and Canada. Results for the nine months ended September 30, 2016 include losses.after-tax costs of $12 million ($0.16 per diluted common share) consisting of employee-related severance and other costs associated with the execution of IT outsourcing contracts, employee-related severance costs associated with our optimization initiative in South America, and costs attributable to the 2015 sale of the Port Colborne plant. Additionally, our results for the nine months ended September 30, 2016 include $1 million ($0.01 per diluted common share) associated with the integration of acquired operations.
2127
Without the acquisition and integration, restructuring, inventory markup, and tax settlement, net income for the three and nine months ended September 30, 2017 would have grown 12 percent and 9 percent, respectively, from the comparable prior periods, while diluted earnings per share would have grown 13 percent and 10 percent, respectively, from the comparable prior periods. These increases for the three and nine months ended September 30, 2017 primarily reflect continued strong operating results in our North America segment during the year, partially offset by lower earnings in our South America segment due to continued difficult macroeconomic conditions and increased costs in Argentina. The increase for the nine months ended September 30, 2017 was partially offset by higher net financing costs.
Net Sales. Net sales for the third quarter of 2017 were flat from $1.49 billion a year ago. Volume growth of 2 percent, which was comprised of 2 percent growth from recent acquisitions, was offset by a 2 percent decrease in price/product mix driven by lower raw material costs. Net sales for the nine months ended September 30, 2017 increased 2 percent to $4.40 billion from $4.30 billion for the nine months ended September 30, 2016. The increase was driven by volume growth of 3 percent, which was comprised of 2 percent growth from recent acquisitions and 1 percent increase in organic volume growth, and favorable currency translation of 1 percent reflecting a stronger Brazilian real, partially offset by a 2 percent decrease in price/product mix.
North America’s net sales for the third quarter of 2017 were relatively flat at $903 million from $899 million a year ago.Volume growth of 1 percent, which was comprised of 4 percent growth from the TIC Gums acquisition and a 3 percent decline in organic volume due largely to customer shifts in the brewing industry in Mexico and supply chain interruptions caused by natural disasters that affected both our customers and us. This was offset by a 1 percent decrease in price/product mix driven by lower raw material costs. North America’s net sales for the nine months ended September 30, 2017 increased 2 percent to $2.69 billion from $2.63 billion for the nine months ended September 30, 2016.This increase was driven by volume growth of 3 percent primarily from the TIC Gums acquisition, partially offset by a 1 percent decrease in price/product mix driven by lower raw material costs.
South America’s net sales for third quarter of 2017 decreased 7 percent to $257 million from $276 million a year ago. This decrease was primarily driven by an 8 percent decrease in price/product mix due to lower raw material costs in Brazil and unfavorable currency translation of 2 percent reflecting a weaker Argentine peso in the quarter, partially offset by a volume increase of 3 percent. South America’s net sales for the nine months ended September 30, 2017 increased 1 percent to $740 million from $731 million for the nine months ended September 30, 2016. This increase was driven by favorable currency translation of 5 percent primarily reflecting a stronger Brazilian real, partially offset by a 3 percent decrease in price/product mix due to lower raw material costs in Brazil and a volume decrease of 1 percent, primarily due to difficult macroeconomic conditions and the interruption of manufacturing activities in Argentina.
Asia Pacific’s net sales for the third quarter of 2017 increased 2 percent to $189 million from $185 million a year ago. This increase was driven by volume growth of 8 percent, which was comprised of 7 percent organic volume growth and 1 percent growth from our recent acquisitions in the region, partially offset by a 6 percent decrease in price/product mix due to core customer mix diversification and pass through of lower raw material costs. Asia Pacific’s net sales for the nine months ended September 30, 2017 increased 4 percent to $555 million from $534 million for the nine months ended September 30, 2016. This increase was driven by volume growth of 9 percent, which was comprised of 8 percent organic volume growth and 1 percent volume increase from our recent acquisitions in the region, and favorable currency translation of 1 percent primarily reflecting a stronger Korean won. The increase in volume was partially offset by a 6 percent decrease in price/product mix due to core customer mix diversification.
EMEA’s net sales for the third quarter of 2017 increased 5 percent to $136 million from $129 million a year ago. This increase was driven by a 2 percent increase in price/product mix, favorable currency translation of 2 percent primarily reflecting a stronger Euro in the quarter, and a volume increase of 1 percent. EMEA’s net sales for the nine months ended September 30, 2017 increased 1 percent to $411 million from $405 million a year ago. This increase was driven by a 2 percent increase in price/product mix and volume growth of 1 percent, partially offset by unfavorable currency translation of 2 percent, primarily reflecting a weaker British Pound sterling.
Cost of Sales and Operating Expenses. Cost of sales for the third quarter of 2017 decreased 2 percent to $1.10 billion from $1.12 billion a year ago. Our gross profit margin was 26 percent for the third quarter of 2017, up from 25 percent last year. The decline in cost of sales and improvement in gross profit margin are primarily driven by overall lower raw material costs and improved operational efficiencies. Operating expenses for the third quarter of 2017 increased to $152 million from $149 million last year. This increase was primarily driven by the incremental operating expenses of
22
acquired operations. Operating expenses, as a percentage of gross profit, were 39 percent for the third quarter of 2017 as compared to 40 percent a year ago.
Cost of sales for the nine months ended September 30, 2017 increased 1 percent to $3.28 billion from $3.24 billion a year ago. This increase was primarily driven by an increase of 2 percent in net sales volume. Our gross profit margin was 25 percent for the nine months ended September 30, 2017, flat with 25 percent last year. The gross profit margin remained flat due to higher operating costs as a result of the temporary manufacturing interruption in Argentina offset by overall lower raw material cost and improved operational efficiencies in North America. Operating expenses for the nine months ended September 30, 2017 increased to $458 million from $431 million last year. This increase was primarily driven by the incremental operating expenses of acquired operations. Operating expenses, as a percentage of gross profit, were 41 percent for the third quarter of 2017 as compared to 41 percent a year ago.
Operating Income. Third quarter of 2017 operating income increased 5 percent to $233 million from $221 million a year ago. Operating income for the third quarter of 2017 includes pre-tax net restructuring costs of $7 million consisting of $4 million of other restructuring costs associated with a Finance Transformation initiative and $3 million of other pre-tax restructuring costs including employee-related severance costs in North America. Additionally, the third quarter results include $1 million of costs associated with the integration of acquired operations. Operating income for third quarter of 2016 includes pre-tax costs of $2 million consisting of employee-related severance and other costs associated with the execution of IT outsourcing contracts. Without the restructuring and acquisition-related charges, our third quarter of 2017 operating income would have grown 8 percent from the third quarter of 2016. The increase primarily reflects operating income growth in North America. Currency translation had a net favorable impact of $2 million, reflecting the movements of the Canadian dollar, Brazilian real, and Argentine peso during the quarter.
Operating income for the nine months ended September 30, 2017 increased 3 percent to $639 million from $619 million for the nine months ended September 30, 2016. Operating income for the nine months ended September 30, 2017 includes pre-tax net restructuring costs of $23 million consisting of $17 million of employee-related severance and other costs associated with our restructuring effort in Argentina, $5 million of other restructuring costs associated with a Finance Transformation initiative, and $1 million of other pre-tax restructuring charges that including employee-related severance costs in North America and a refinement of estimates for prior year restructuring activities. Additionally, the nine months ended September 30, 2017 results include $9 million of costs primarily associated with the TIC Gums inventory that was adjusted to fair value at the acquisition date, and $3 million of costs associated with the integration of acquired operations. Operating income for the nine months ended September 30, 2016 includes pre-tax costs of $15 million consisting of employee-related severance and other costs associated with the execution of IT outsourcing contracts and $2 million of costs associated with the integration of acquired operations. Without the restructuring and acquisition-related charges, our operating income for the nine months ended September 30, 2017 would have grown 6 percent from the prior year period. The increase primarily reflects operating income growth in North America, partially offset by an operating income decrease in South America. Currency translation had a net favorable impact of $8 million, reflecting the movements of the Brazilian real, Argentine peso, and Canadian dollar.
North America’s third quarter of 2017 operating income increased 9 percent to $179 million from $164 million a year ago. This increase was primarily driven by net margin improvement from favorable raw material costs and operational efficiencies, partially offset by a decrease in price/product mix. North America’s operating income for the nine months ended September 30, 2017 increased 10 percent to $520 million from $474 million for the nine months ended September 30, 2016. This increase was primarily driven by net margin improvement from favorable raw material costs and operational efficiencies, in addition to organic and acquisition-related volume growth compared to the prior period, and partially offset by a decrease in price/product mix.
South America’s third quarter 2017 operating income decreased 4 percent to $26 million from $27 million a year ago. This decrease was primarily driven by a decrease in price/product mix and partially offset by a margin improvement due to favorable raw material costs. South America’s operating income for the nine months ended September 30, 2017 decreased 25 percent to $44 million from $59 million for the nine months ended September 30, 2016. This decrease was primarily driven by difficult macroeconomic conditions in the region, interruption of manufacturing activities resulting in temporary higher operating costs in Argentina during the second quarter, and unfavorable price/product mix. This decrease was partially offset by a net margin improvement from favorable raw material costs and an $8 million favorable currency translation impact reflecting the movements of the Brazilian real and Argentine peso.
23
Asia Pacific’s third quarter 2017 operating income was flat from $29 million a year ago. Volume growth and improved operational efficiencies were offset by a decrease in price/product mix due to core customer mix diversification. Asia Pacific’s operating income for the nine months ended September 30, 2017 increased 1 percent to $88 million from $87 million for the nine months ended September 30, 2016. This increase was driven by volume growth, improved operational efficiencies, and a net margin improvement due to favorable raw material costs, offset by a decrease in price/product mix due to core customer mix diversification.
EMEA’s third quarter 2017 operating income increased 4 percent to $26 million from $25 million a year ago. This increase was primarily driven by favorable price/product mix and volume growth during the period, partially offset by increased operating costs. EMEA’s operating income for the nine months ended September 30, 2017 increased 4 percent to $83 million from $80 million for the nine months ended September 30, 2016. This increase was primarily driven by favorable price/product mix and volume growth, partially offset by increased operational costs and a net margin decrease due to unfavorable raw material costs.
Financing Costs, net. Financing costs for the third quarter of 2017 increased to $16 million from $15 million in the prior-year period. This increase was primarily driven by higher weighted average short-term borrowing costs and an increase in short-term borrowings.
Financing costs for the nine months ended September 30, 2017 increased to $57 million from $48 million for the nine months ended September 30, 2016. This increase was due to higher weighted average short-term borrowing costs and an increase in short-term borrowings. Additionally, an increase in foreign currency transaction losses contributed to the increase.
Provision for Income Taxesincome taxes.Our effective income tax rate for the third quarter of 2017 decreased to 22.1 percent from 29.2 percent a year ago. The effective income tax rate for the ninesix months ended SeptemberJune 30, 20172018 was 26.3 percent compared to 30.1 percent a year ago.26.2 percent.
We use the U.S. dollarDollar as the functional currency for our subsidiaries in Mexico. ForIn the three and ninesix months ended SeptemberJune 30, 2017,2018, the effective tax rates were reducedrate was increased by 1.00.1 percent and 1.7 percent, respectively, due to the revaluationdevaluation of the Mexican pesoPeso versus the U.S. dollar.
Dollar. In addition, we increased the valuation allowance on the net deferred tax assets of a foreign subsidiary. As a result, in the six months ended June 30, 2018, the effective tax rate was increased by 0.3 percent.
The above unfavorable items were offset by the provisions of the Tax Cuts and Jobs Act (“TCJA”) enacted on December 22, 2017. The TCJA introduced numerous changes in the U.S. federal tax laws. Changes that have a significant impact on our effective tax rate are a reduction in the U.S. corporate tax rate from 35 percent to 21 percent; elimination of federal income tax on dividends from our foreign subsidiaries, and the imposition of a U.S. tax on our global intangible low-taxed income (“GILTI”). The TCJA also eliminated the domestic production activities deduction for years beginning after December 31, 2017.
The effective income tax rate for the three and ninesix months ended SeptemberJune 30, 2017 was 28.8 percent. Our effective income tax rate for the six months ended June 30, 2017 was reduced by 2.0 percent, due to the revaluation of the Mexican Peso versus the U.S. Dollar. In addition, we increased the valuation allowance on the net deferred tax assets of a foreign subsidiary. As a result, in the six months ended June 30, 2017, the effective tax rates wererate was increased by 2.0 percent and 1.8 percent, respectively.
We had been pursuing relief from double taxation under the U.S.-Canada tax treaty for the years 2004-2013. During the fourth quarter of 2016, a tentative settlement was reached between the U.S. and Canada and, consequently, last year we established a net reserve of $24 million, including interest thereon, recorded as a $70 million liability and a $46 million benefit. In the third quarter of 2017, the two countries finalized the agreement, which eliminated the double taxation, and we paid $63 million to the IRS to settle the liability. As a result of that agreement, we are entitled to deduct a foreign exchange loss of $10 million on our 2017 U.S. federal income tax return. For the three and nine months ended September 30, 2017, the effective tax rates were reduced by 4.9 percent and 1.8 percent, respectively, due to the foreign exchange loss deduction.1.7 percent. The foreign exchange loss was not recognized in income before taxes because it arose from the terms of the agreement.
The above discrete tax items were partially offset by individually insignificant discrete items. Without these items, the rate
Segment Results
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
| Favorable (Unfavorable) |
| Favorable (Unfavorable) |
| |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage |
| |||
Net sales to unaffiliated customers |
| $ | 1,790 |
| $ | 1,786 |
| $ | 4 |
| — | % |
Operating income |
|
| 293 |
|
| 338 |
|
| (45) |
| (13) | % |
Net sales. Our net sales remained relatively flat for the three and ninesix months ended SeptemberJune 30, 2018, as compared to the six months ended June 30, 2017, would have been approximately 27.3primarily driven by volume increases of 1 percent and 28.1 percent, respectively.
Our effective income tax rates for the three and nine months ended September 30, 2016which were increased by 2.3 percent and 2.5 percent, respectively, due to the devaluation of the Mexican peso versus the U.S. dollar. The impact of the Mexican peso was partially offset by individually insignificant factors. Without these items, the rates for the threea 1 percentage point unfavorable impact in price/product mix driven by increased freight and nine months ended September 30, 2016 would have been approximately 27.4 percent and 28.3 percent, respectively.production costs.
Comprehensive Income Attributable to IngredionOperating income.. Comprehensive Our operating income decreased $45 million for the third quartersix months ended June 30, 2018 compared to the six months ended June 30, 2017, primarily driven by increased production and freight costs, lower U.S./Canada sweetener and industrial starch demand and commodity pricing pressures.
South America
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|
|
|
|
|
|
|
| Six Months Ended June 30, |
| Favorable (Unfavorable) |
| Favorable (Unfavorable) |
| |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage |
| |||
Net sales to unaffiliated customers |
| $ | 481 |
| $ | 483 |
| $ | (2) |
| — | % |
Operating income |
|
| 46 |
|
| 19 |
|
| 27 |
| 142 | % |
Net sales. Our net sales remained relatively flat for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017. Volume growth of 2017 increased to $186 million7 percent and a 4 percentage point favorable impact from $138 million a year ago. The increase reflectsprice/product mix was offset by an 11 percentage point unfavorable foreign currency translation driven by the weaker Argentine peso and Brazilian real.
Operating income. Our increase in netoperating income favorable variances dueof $27 million for the six months ended June 30, 2018, as compared to losses resulting from cash-flow hedging activities,the six months ended June 30, 2017, was primarily driven by volume growth, improved operational efficiencies, the lapping of our 2017 Argentina manufacturing optimization project and favorable currency translation adjustments.a modestly improving macroeconomic environment.
2428
Asia Pacific
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|
|
| Six Months Ended June 30, |
| Favorable (Unfavorable) |
| Favorable (Unfavorable) |
| |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage |
| |||
Net sales to unaffiliated customers |
| $ | 395 |
| $ | 366 |
| $ | 29 |
| 8 | % |
Operating income |
|
| 50 |
|
| 60 |
|
| (10) |
| (17) | % |
Comprehensive incomeNet sales. Our net sales increased 8 percent for the ninesix months ended SeptemberJune 30, 2018, as compared to the six months ended June 30, 2017, increasedprimarily driven by favorable currency translation of 6 percentage points, volume growth of 1 percent and a 1 percentage point increase in price/product mix due to $482 million from $459core customer mix diversification.
Operating income. Our operating income decreased $10 million for the ninesix months ended SeptemberJune 30, 2016. This increase reflects an increase2018, as compared to the six months ended June 30, 2017, primarily driven by a lag in net income, favorable variances due to losses resulting from cash-flow hedging activities,the pass through of higher tapioca costs partially offset by unfavorablevolume growth and favorable foreign exchange rates.
EMEA
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|
| Six Months Ended June 30, |
| Favorable (Unfavorable) |
| Favorable (Unfavorable) |
| |||||
(in millions) |
| 2018 |
| 2017 |
| Variance |
| Percentage |
| |||
Net sales to unaffiliated customers |
| $ | 299 |
| $ | 275 |
| $ | 24 |
| 9 | % |
Operating income |
|
| 60 |
|
| 57 |
|
| 3 |
| 5 | % |
Net sales. Our net sales increased 9 percent for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017. The increase was primarily driven by volume growth of 6 percent and favorable currency translation adjustments.of 3 percentage points.
Operating income. Our operating income increased $3 million for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017, primarily driven by volume growth offset by higher raw material costs in Pakistan.
Liquidity and Capital Resources
Cash provided by operating activities for the ninesix months ended SeptemberJune 30, 20172018 was $524$352 million, as compared to $542$302 million a year ago.for the six months ended June 30, 2017. The decreaseincrease in operating cash flow includes one-time net tax receipts of $89 million primarily reflectsas a result of the changes in our working capital, partially offset by an increase in our net income.2017 Tax Cuts and Jobs Act and the U.S.-Canada tax settlement.
Capital expenditures and mechanical store purchases of $222$160 million for the ninesix months ended SeptemberJune 30, 20172018 are in line with our capital spending plan for the year. We anticipate that our capital expenditures and mechanical stores purchases will be approximately $300$330 million to $325$360 million for 2017. During the first quarter of 2017, we repurchased approximately 1 million shares of our common stock in open market transactions for $123 million.
On August 18, 2017, the Company entered into a new Term Loan Credit Agreement (“Term Loan”) to establish a senior unsecured term loan credit facility. Under the Term Loan, the Company is allowed three borrowings in an amount of up to $500 million total. The Term Loan matures 18 months from the date of the final borrowing. As of September 30, 2017, the Company had initiated two borrowings under the Term Loan totaling $380 million. The proceeds were used to refinance $300 million of 1.8 percent senior notes due September 25, 2017 and pay down borrowings outstanding on the revolving credit facility. On October 25, 2017, the Company initiated its third and final borrowing under the Term Loan of $40 million, bringing the total outstanding Term Loan to $420 million, due April 25, 2019. See also Note 11 of the Condensed Consolidated Financial Statements.2018.
As of SeptemberJune 30, 2017,2018, there were borrowings of $380$165 million outstanding under the Term Loan Credit Agreement and no borrowings of $19 million outstanding under the Revolvingrevolving credit facility (the “Revolving Credit Facility.Agreement”). We paid $230 million towards the Term Loan during the six months ended June 30, 2018. In addition to the borrowing availability under the Revolving Credit Agreement, we have approximately $493$485 million of unused operating lines of credit in the various foreign countries in which we operate.
As of SeptemberJune 30, 2017,2018, we had total debt outstanding of $1,884 million,$1.7 billion, compared to $1,956 million at$1.9 billion as of December 31, 2016. 2017.
29
As of SeptemberJune 30, 20172018 our total debt consists of the following:
|
|
|
|
| ||||
|
|
|
| |||||
|
| As of |
|
|
|
|
| |
(in millions) |
| September 30, 2017 |
|
|
|
| ||
3.2% senior notes due October 1, 2026 |
| $ | 496 |
|
| $ | 496 |
|
4.625% senior notes due November 1, 2020 |
|
| 398 |
|
|
| 399 |
|
6.625% senior notes due April 15, 2037 |
|
| 254 |
|
|
| 254 |
|
5.62% senior notes due March 25, 2020 |
|
| 200 |
|
|
| 200 |
|
Term loan credit agreement due April 25, 2019 |
|
| 380 |
|
|
| 165 |
|
Revolving credit facility |
|
| — |
|
|
| 19 |
|
Fair value adjustment related to hedged fixed rate debt instruments |
|
| 3 |
|
|
| (3) |
|
Long-term debt |
| $ | 1,731 |
|
|
| 1,530 |
|
Short-term borrowings |
|
| 153 |
|
|
| 133 |
|
Total debt |
| $ | 1,884 |
|
| $ | 1,663 |
|
The weighted average interest rate on our total indebtedness was approximately 4.14.8 percent for the ninesix months ended SeptemberJune 30, 2017,2018, compared to 3.94.3 percent in the comparable prior-year period.six months ended June 30, 2017.
On September 15, 2017,May 16, 2018, our Board of Directors declared a quarterly cash dividend of $0.60 per share of common stock. This dividend was paid on OctoberJuly 25, 20172018 to stockholders of record at the close of business on OctoberJuly 2, 2017.2018.
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 financing activities for the foreseeable future.
25
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 U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. Approximately $484$351 million of the total $505$365 million of cash and cash equivalents and short-term investments at SeptemberJune 30, 20172018 was held by our operations outside of the U.S. We expect that available cash balances and credit facilities in the U.S., 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.
Hedging and Financial Risk
Hedging:We are exposed to market risk stemming from changes in commodity prices (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 commodity-related futures, options and swap contracts, forward currency-related contracts and options, interest rate swap agreements and Treasury lock agreements (“T-Locks”). See Note 67 of the Notes to the Condensed Consolidated 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 our 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 12 to 24 months, in order to hedge price risk associated with fluctuations in market prices. We also enter into futures contracts to hedge price risk associated with fluctuations in the market price 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 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”). At SeptemberAs of June 30, 2017,2018, our accumulated other comprehensive loss account (“AOCI”) included $5$7 million of losses net(net of income taxes of $4 million,$5 million) related to these derivative instruments. It is anticipated that $6 million of these losses (net of income taxes of $2 million) will be reclassified into earnings during the next 12 months. We expect the losses to be offset by changes in the underlying commodities costs.
30
Foreign Currency Exchange Risk: Due to our global operations, including operations in many emerging markets, we are exposed to fluctuations in foreign currency exchange rates. As a result, we have exposure to translational foreign exchange risk when our foreign operations’ results are translated to U.S. dollars and to transactional foreign exchange risk when transactions not denominated in the functional currency of the operating unit are revalued. We primarily use derivative financial instruments such as foreign currency forward contracts, swaps and options to manage our foreign currency transactional exchange risk. At SeptemberAs of June 30, 2017,2018, we had foreign currency forward sales contracts with an aggregate notional amount of $426 million and foreign currency forward purchase contracts that are designated as fair value hedges with an aggregate notional amount of $447 million and foreign currency forward purchase contracts with an aggregate notional amount of $173$135 million that hedged transactional exposures.
We also have foreign currency derivative instruments that hedge certain foreign currency transactional exposures and are designated as cash-flowcash flow hedges. At SeptemberAs of June 30, 2017,2018, AOCI included $1 million of losses (net of an insignificant amount of losses, net of income taxes,taxes) relating to these hedges.
We have significant operations in Argentina. We utilizeHistorically, we have utilized the official exchange rate published by the Argentine government for re-measurementremeasurement purposes. Due to exchange controls put in place by the Argentine government, a parallel market exists for exchanging Argentine pesos to U.S. dollars at rates less favorable than the official rate, although the difference in rates has decreased significantly from past levels. We have been closely monitoring the inflation data and currency volatility in Argentina, where there are multiple data sources for measuring and reporting inflation. In the second quarter of 2018, the Argentine peso 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 our affiliate, Ingredion Argentina S.A. (“Argentina”). Under highly inflationary accounting, Argentina’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. As of June 30, 2018, Argentina had a small net peso monetary liability position. Net sales of Argentina were less than four percent of our consolidated net sales for the six months ended June 30, 2018.
Interest Rate Risk: We occasionally use interest rate swaps and 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 as of SeptemberJune 30, 2017.2018.
As of SeptemberJune 30, 2017,2018, our AOCI account included $3$2 million of losses (net of income taxes of $2$1 million) related to settled T-Locks. These deferred losses are being amortized to financing costs over the terms of the senior notes with which
26
they are associated. It is anticipated that $1 million of these losses (net of income taxesan insignificant amount of $1 million)taxes) will be reclassified into earnings during the next 12 months.
As of SeptemberJune 30, 2017,2018, we have an interest rate swap agreementsagreement that effectively convertconverts the interest rates on $200 million of our $400 million of 4.625 percent 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 U.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.fair value hedge. The fair value of thesethe interest rate swap agreementsagreement as of June 30, 2018 was a $3 million at September 30, 2017loss, and is reflected in the Condensed Consolidated Balance Sheets within other assets,non-current liabilities, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligations.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 20162017 Annual Report on Form 10-K. See Note 2 of the Notes to the Condensed Consolidated Financial Statements for additional information regarding the Company’s adoption of the new revenue and pension standards. There have been no other changes to our critical accounting policies and estimates during the ninethree and six months ended SeptemberJune 30, 2017.2018.
31
FORWARD-LOOKING STATEMENTS
This Form 10-Q 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, any statements regarding the Company’s prospects or future financial condition, earnings, revenues, tax rates, capital expenditures, 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”, “believe,” “plan,” “project,” “estimate,” “expect,” “intend,” “continue,” “pro forma,” “forecast,” “outlook,” “propels,” “opportunities,” “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 ininto 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 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, market and weather conditions in the various geographic regions and countries in which we buy our raw materials or manufacture or sell our products; future financial performance of major industries which we serve, including, without limitation, the food, and beverage, paper corrugatedand corrugating, and brewing industries; energy costs and availability, freight and shipping costs, and changes in regulatory controls regarding quotas,quotas; tariffs, duties, taxes and income tax rates,rates; particularly recently enacted United States tax reform; operating difficulties; availability of raw materials, including potato starch, tapioca, gum arabic and the specific varieties of corn upon which some of our products are based; our ability to develop or acquire new products and services at a raterates or of a qualityqualities sufficient to meet expectations; energy issues in Pakistan; boiler reliability; our ability to effectively
27
integrate and operate acquired businesses; our ability to achieve budgets and to realize expected synergies; our ability to achieve expected cost savings under our Cost Smart program;our ability to complete planned maintenance and investment projects successfully and on budget; labor disputes; genetic 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; and the outbreak or continuation of serious communicable disease or hostilities including acts of terrorism. Factors relating 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.
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 “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 20162017 and subsequent reports on Forms 10-Q and 8-K.
32
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion set forth in Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk at pages 5055 to 5156 in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, for a discussion as to how we address risks with respect to interest rates, raw material and energy costs and foreign currencies. There have been no material changes in the information that would be provided with respect to those disclosures from December 31, 20162017 to SeptemberJune 30, 2017.2018.
ITEM 4
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 SeptemberJune 30, 2017.2018. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective in providing reasonable assurance that all information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, has been recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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.
In the fourth quarter of 2016, we acquired Shandong Huanong Specialty Corn Development Co., Ltd. in Pingyuan County, Shandong Province, China (“Shandong Huanong”) and TIC Gums Incorporated (“TIC Gums”). In the first quarter of 2017, we acquired Sun Flour Industry Co., Ltd. (“Sun Flour”) in Thailand. 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 ninethree months ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
2833
PART II OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
We are a party to a large number of labor claims relating to our Brazilian operations. We have reserved an aggregate of approximately $5$4 million as of SeptemberJune 30, 20172018 in respect of these claims. These labor claims primarily relate to dismissals, severance, health and safety, work schedules and salary adjustments.
We are currently subject to various other claims and suits arising in the ordinary course of business, including 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 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities:
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| Maximum Number |
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| (or Approximate |
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| Total Number of |
| Dollar Value) of |
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| Total |
| Average |
| Shares Purchased as |
| Shares That May Yet |
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| Number |
| Price |
| Part of Publicly |
| be Purchased Under |
|
|
| of Shares |
| Paid |
| Announced Plans or |
| the Plans or Programs |
|
(shares in thousands) |
| Purchased |
| per Share |
| Programs |
| at End of Period |
|
April 1 – April 30, 2018 |
| — |
| — |
| — |
| 3,702 shares |
|
May 1 – May 31, 2018 |
| 1,250 |
| 112.91 |
| 1,250 |
| 2,452 shares |
|
June 1 – June 30, 2018 |
| — |
| — |
| — |
| 2,452 shares |
|
Total |
| 1,250 |
| 112.91 |
| 1,250 |
|
|
|
On December 12, 2014, the Board of Directors authorized a stock repurchase program permitting the Company to purchase up to 5 million of its outstanding common shares from January 1, 2015 through December 31, 2019. At SeptemberAs of June 30, 2017,2018, we have 3.72.5 million shares available for repurchase under the stock repurchase program.
2934
ITEM 6
EXHIBITS
a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto.
All other items hereunder are omitted because either such item is inapplicable or the response is negative.
EXHIBIT INDEX
|
|
|
Number |
| Description of Exhibit |
|
|
|
10.18 |
| |
31.1 |
| CEO Section 302 Certification Pursuant to the Sarbanes-Oxley Act of 2002 |
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|
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31.2 |
| CFO Section 302 Certification Pursuant to the Sarbanes-Oxley Act of 2002 |
|
|
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32.1 |
| |
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|
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32.2 |
| |
|
|
|
101 |
| The following financial information from Ingredion Incorporated’s Quarterly Report on Form 10-Q for the quarterly period ended |
3035
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| INGREDION INCORPORATED | |
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| |
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| |
DATE: |
| By | /s/ James D. Gray |
|
| James D. Gray | |
|
| Executive Vice President and Chief Financial Officer | |
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| |
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| |
DATE: |
| By | /s/ Stephen K. Latreille |
|
| Stephen K. Latreille | |
|
| Vice President and Corporate Controller |
3136