EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The year 2002 proved to be a challenging one for Corn Products
International, Inc. given the enactment of a discriminatory tax on soft drinks
sweetened with high fructose corn syrup ("HFCS") in Mexico (see Recent
Developments and Outlook section below) and difficult economic conditions in
South America. Despite these difficulties, however, our net income increased
from the prior year driven by substantially lower financing costs and the
discontinuation of goodwill amortization. Additionally, our operating cash flows
grew 20 percent and our debt level was substantially reduced.
In North America, significantly lower operating income in Mexico caused by
the discriminatory tax on beverages sweetened with HFCS more than offset
improved earnings throughout the rest of the region, resulting in a 14 percent
decline in operating income for the region. In South America, operating earnings
decreased 15 percent reflecting difficult economic conditions and local currency
weakness throughout the region. In Asia/Africa, higher sales volume, stronger
Asian currencies and the discontinuation of goodwill amortization drove
operating income up 20 percent from 2001.
In 2001, we began selling, marketing and distributing designated sweetener
production destined for sale in the United States through CornProductsMCP
Sweeteners LLC ("CPMCP"), a limited liability joint marketing company owned by
the Company and Minnesota Corn Processors, LLC ("MCP"). On July 11, 2002, MCP
announced that it had signed a merger agreement with Archer-Daniels-Midland
Company ("ADM"), whereby MCP would merge with a subsidiary of ADM. The
consummation of the merger was subject to a number of conditions, including
approval from the unit holders of MCP and various regulatory agencies. On
September 5, 2002, the unit holders of MCP approved the proposed sale. Shortly
thereafter, the United States Justice Department's Antitrust Division filed a
lawsuit in U.S. District Court, formally blocking the proposed transaction, and
simultaneously also filed a consent decree approving the sale and requiring
CPMCP to be dissolved by December 31, 2002.
On September 6, 2002, we were notified of MCP's desire to dissolve CPMCP
effective December 31, 2002. On December 27, 2002, the Company and MCP agreed in
principle to a plan of dissolution that will allow for the orderly wind up of
CPMCP activities. Under the terms of the plan of dissolution, MCP agreed to pay
us an $11 million termination fee as required under the CPMCP Limited Liability
Company Agreement between the Company and MCP dated December 1, 2000. We
received this payment on December 31, 2002. In addition, we recorded an $8
million charge for our share of costs incurred relating to the dissolution.
These expenses consist primarily of direct incremental costs related to the
termination of employees, early termination of leases, losses on the disposition
of assets and other wind-down costs. The net non-recurring income of $3 million
($2 million after-tax, or $0.06 per diluted share) is included in other income
in the 2002 Consolidated Statement of Income.
RECENT DEVELOPMENTS AND OUTLOOK
On January 1, 2002, a discriminatory tax on soft drinks sweetened with HFCS
approved by the Mexican Congress late in 2001, became effective. This tax was
temporarily suspended on March 5, 2002. In response to the enactment of the tax,
which at the time effectively ended the use of HFCS for soft drinks in Mexico,
we ceased production of HFCS 55 at our San Juan del Rio plant, one of our four
plants in Mexico. Effective with the March 5, 2002 suspension of the tax, we
resumed the production and sale of HFCS in Mexico, although at levels below
historical volumes. On July 12, 2002, the Mexican Supreme Court annulled the
temporary suspension of the tax, thereby resuming the tax, and we curtailed the
production of HFCS 55 at our San Juan del Rio plant. On December 10, 2002, the
Mexican Congress declined to repeal the controversial tax on soft drinks
sweetened with HFCS.
We are disappointed with the Mexican Congress' decision to retain the tax
on soft drinks sweetened with HFCS. However, we continue to explore all options
for resolving the situation and minimizing any potential
22
long-term negative financial impact that might occur. We have engaged in
discussions regarding the matter with both U.S. and Mexican government trade
officials, and have received informal assurances from both sides that repeal of
the tax is a condition precedent to resolving certain trade issues between the
countries. These same officials have also implied that a resolution of these
matters is expected in the near term. However, we cannot predict with any
certainty whether these trade matters will ultimately be resolved or the
likelihood or timing of repeal of the tax on soft drinks sweetened with HFCS. In
the meantime, we are attempting to mitigate the negative effects of the tax on
HFCS demand in Mexico by exploring other markets for our HFCS production
capacity in and around Mexico. We are continuing the restructuring of our
Mexican operations in an effort to improve efficiency and reduce operating
costs. We have also initiated formal action to seek compensation for damage to
our Mexican operations under the provisions of the North American Free Trade
Agreement (NAFTA).
On January 28, 2003, we notified the Government of Mexico of our intention
to submit to arbitration a claim for compensation under the investment
provisions of the NAFTA. We believe that the Government of Mexico has violated
certain of its obligations with respect to foreign investors under the NAFTA,
including those regarding non-discriminatory treatment and expropriations. The
claim, which approximates $250 million, seeks compensation for past and
potential lost profits and other costs related to our operations in Mexico as
well as our costs in pursuing resolution of this matter. The filing of the
notice of intent is the first step required by the NAFTA in pursuing the
resolution of an investment dispute. The NAFTA requires the Company to serve
written notice of its intention to submit a claim at least three months prior to
submitting the claim to arbitration. Pursuant to the process, the Company and
the Government of Mexico must continue to attempt to resolve the situation
through consultation or negotiation during this period.
Until there is a favorable resolution of the Mexican tax on soft drinks
sweetened with HFCS, we expect that we will be unable to make any significant
sales of HFCS to the soft drink industry in Mexico. Management continues to seek
a permanent repeal of the tax and currently believes that the matter will
ultimately be resolved through negotiations between the governments of the
United States and Mexico. Until that occurs, however, our operating results and
cash flows will continue to be adversely affected by the Mexican tax on soft
drinks sweetened with HFCS.
We currently believe that 2003 net income will improve from the past year
despite the Mexican HFCS tax.
RESULTS OF OPERATIONS
2002 COMPARED TO 2001
Net Income. We reported net income of $63 million, or $1.77 per diluted
common share for the year 2002, as compared to $57 million, or $1.60 per diluted
common share for 2001. The 2002 results include $8 million ($5 million
after-tax) of net non-recurring earnings consisting primarily of a gain from the
sale of a business unit, net of certain one-time charges, and the impact from
the dissolution of CPMCP. The non-recurring earnings include an $8 million
pretax gain from the February 2002 sale of Enzyme-Bio Systems Ltd. ("EBS") and
$3 million of net non-recurring earnings related to the dissolution of CPMCP,
partially offset by $4 million of charges principally related to workforce
reductions in North America. Additionally, a one-time gain of $1 million
resulting from the curtailment of certain benefit costs pertaining to the EBS
sale and workforce reduction was recorded. The 2001 results include $5.4 million
($3.5 million after-tax) of net non-recurring earnings related to a value-added
tax refund net of certain one-time charges. Excluding the net non-recurring
income from both 2002 and 2001, we earned $58 million, or $1.63 per diluted
share in 2002, compared to $53 million, or $1.50 per diluted share in 2001. This
increase primarily reflects significantly lower financing costs and, to a lesser
extent, the discontinuation of goodwill amortization which more than offset a
reduction in operating income mainly attributable to lower earnings in North
America and South America and an increase in minority interest. Results for 2001
include goodwill amortization expense of $12 million ($8 million after-tax), or
$0.21 per diluted share. We discontinued amortization of goodwill following the
adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," effective January 1, 2002.
23
Net Sales. Net sales for 2002 declined slightly to $1.87 billion from
$1.89 billion in 2001, as decreased sales in South America more than offset
increased sales in Asia/Africa and North America.
A summary of net sales by geographic region is shown below:
<Table>
<Caption>
INCREASE
2002 2001 (DECREASE) % CHANGE
------ ------ ---------- --------
(IN MILLIONS)
North America.................................. $1,219 $1,212 $ 7 1%
South America.................................. 401 440 (39) (9)%
Asia/Africa.................................... 251 235 16 7%
------ ------ ---- ----
Total.......................................... $1,871 $1,887 $(16) (1)%
====== ====== ==== ====
</Table>
Weaker foreign currencies, particularly in South America, reduced sales by
11 percent, which offset improved price/product mix worldwide. Volume declines
reduced sales by 1 percent.
Sales in North America increased 1 percent, as a 3 percent price/product
mix improvement was offset by a volume decline of 1 percent and slightly weaker
local currencies. Sales in South America fell 9 percent, as price/product mix
improvements, while significant (up 37 percent), lagged local currency
devaluation throughout the region. Additionally, volume in the region was down 1
percent. Sales in Asia/Africa increased 7 percent, reflecting 4 percent volume
growth and stronger local currencies. Price/product mix in the region was
essentially unchanged from 2001.
Cost of Sales and Operating Expenses. Cost of sales for 2002 increased 1
percent to $1.60 billion from $1.59 billion in 2001. Excluding the effect of
certain non-recurring items from 2001, cost of sales for 2002 was flat as
compared with last year, while gross profit margin declined to 14 percent from
15 percent in 2001. The lower gross profit percentage principally reflects
reduced operating margins mainly due to the HFCS tax issue in Mexico and
economic weakness in Brazil.
Selling, general and administrative ("SG&A") expenses for 2002 decreased to
$134 million from $154 million in 2001, due primarily to the discontinuation of
goodwill amortization in 2002. We recorded $12 million of goodwill amortization
in 2001. SG&A expenses include non-recurring costs of $3 million and $5 million
in 2002 and 2001, respectively. Excluding the effect of these non-recurring
items and goodwill amortization, SG&A expenses for 2002 represented 7.0 percent
of net sales, down from 7.2 percent in 2001. This decrease principally reflects
cost reductions in North America and lower expenses in South America
attributable to weaker local currencies.
Earnings from Non-Consolidated Affiliates and Other Income. Earnings from
non-consolidated affiliates and other income for 2002 decreased to $20 million
from $21 million in 2001, as the previously mentioned gain from the sale of EBS
($8 million) and income from the CPMCP dissolution ($3 million) were
substantially offset by a $7 million reduction in earnings from non-consolidated
affiliates. Additionally, other income for 2001 included a $3 million gain from
the cancellation of a long-term obligation.
24
Operating Income. A summary of operating income is shown below:
<Table>
<Caption>
FAVORABLE FAVORABLE
(UNFAVORABLE) (UNFAVORABLE)
2002 2001 VARIANCE % CHANGE
---- ---- ------------- -------------
(IN MILLIONS)
North America................................ $ 56 $ 65 $ (9) (14)%
South America................................ 58 68 (10) (15)%
Asia/Africa.................................. 54 45 9 20%
Corporate expenses........................... (23) (17) (6) (35)%
---- ---- ---- -----
Total........................................ $145 $161 $(16) (10)%
Non-recurring items, net..................... 8 5 3 60%
---- ---- ---- -----
Operating income............................. $153 $166 $(13) (8)%
==== ==== ==== =====
</Table>
Operating income for 2002 decreased 8 percent to $153 million from $166
million in 2001. Excluding the net non-recurring earnings from both years and
goodwill amortization from the 2001 period, operating income decreased 16
percent from 2001, reflecting significantly lower earnings in North America and
South America. North America operating income decreased 14 percent from a
year-ago, as significantly lower results for Mexico due to the imposition of the
Mexican HFCS tax more than offset earnings improvements throughout the rest of
the region. Excluding goodwill amortization from the prior year, operating
income in North America dropped 18 percent from 2001. South America operating
income fell 15 percent, primarily due to the difficult economic conditions and
weaker currencies throughout the region, particularly in Brazil. Excluding
goodwill amortization from last year's results, operating income in South
America declined 16 percent from last year. Asia/Africa operating income
increased 20 percent from a year ago largely due to the discontinuation of
goodwill amortization. Excluding goodwill amortization, Asia/Africa operating
income for 2002 was up 3 percent from last year, primarily reflecting stronger
local currencies and increased volume.
Financing Costs. Financing costs decreased to $36 million in 2002 from $64
million in 2001. The decrease primarily reflects lower interest rates, reduced
debt levels and foreign currency transaction gains. We recorded $1 million of
foreign currency transaction gains in 2002 as compared with foreign currency
transaction losses of $8 million in 2001.
Provision for Income Taxes. Our effective tax rate was 36 percent in 2002,
up from 35 percent in 2001. The higher tax rate is mainly due to a change in the
mix of domestic and foreign earnings for 2002 as compared with 2001.
Minority Interest in Earnings. Minority interest in earnings increased to
$12 million in 2002 from $9 million in 2001. The increase primarily reflects
improved earnings in the Southern Cone of South America and Korea, which more
than offset a reduction in minority interest attributable to our increased
ownership in Arancia Corn Products, S.A. de C .V. ("Arancia"). Arancia became a
wholly-owned subsidiary on March 4, 2002.
Comprehensive Loss. We recorded a comprehensive loss of $22 million in
2002 compared to a comprehensive loss of $93 million in 2001. The decrease in
the comprehensive loss reflects a $36 million favorable variance in the currency
translation adjustment, gains from cash flow hedges (net of income taxes) and an
increase in net income. For 2002, we recorded a negative currency translation
adjustment of $94 million, compared to a negative currency translation
adjustment of $130 million in 2001. The unfavorable currency translation
adjustment for 2002 relates primarily to the negative impact of weakened local
currencies, particularly in Argentina and Brazil.
2001 COMPARED TO 2000
Net Income. We reported net income of $57 million, or $1.60 per diluted
common share for the year 2001, as compared to $48 million, or $1.35 per diluted
common share for 2000. The 2001 results include $5.4 million ($3.5 million
after-tax) of non-recurring earnings from a tax refund, net of certain one-time
25
charges. The results for 2000 include special charges of $20 million ($13
million after-tax) pertaining to a workforce reduction program ($17.5 million)
and the write-off of certain capital projects ($2.5 million). Excluding the
non-recurring earnings from the 2001 results and the special charges recorded in
2000, the Company earned $53 million, or $1.50 per diluted share in 2001, down
from $61 million, or $1.72 per diluted share in 2000. This decrease principally
reflects weaker foreign currencies, higher energy costs and increased financing
costs, which more than offset favorable contributions from sales volume growth,
improved selling prices and a reduction in minority interest in earnings.
Net Sales. Net sales for 2001 grew 1 percent to $1.89 billion from $1.87
billion in 2000, as increased sales in North America more than offset sales
declines in South America and Asia/Africa. A summary of net sales by geographic
region is shown below:
<Table>
<Caption>
INCREASE
2001 2000 (DECREASE) % CHANGE
------ ------ ---------- --------
(IN MILLIONS)
North America.................................. $1,212 $1,157 $ 55 5 %
South America.................................. 440 460 (20) (4)%
Asia/Africa.................................... 235 248 (13) (5)%
------ ------ ---- ---
Total.......................................... $1,887 $1,865 $ 22 1 %
====== ====== ==== ===
</Table>
Increased volume worldwide and improved price/mix resulted in net sales
growth of 4 percent and 3 percent, respectively, which was largely offset by a 6
percent reduction attributable to weaker foreign currencies, particularly in
Brazil and Korea. Sales in North America grew 5 percent, reflecting 3 percent
volume growth and 2 percent price/product mix improvement. Significantly higher
volume and improved price/product mix in both Canada and Mexico more than offset
a volume decline in the United States. South America sales declined 4 percent as
currency weakness throughout the region more than offset an 8 percent growth
attributable to increased volume and a 3 percent price/product mix improvement.
The value of local currencies in relation to the US dollar fell in each country
within the region, with the decline in the Brazilian Real having the most
significant impact. Local currency weakness also caused sales in Asia/Africa to
decline in terms of U.S. dollars from the prior year. Sales in Asia/Africa
decreased 5 percent as weaker currencies in Korea, and to a lesser extent in
Pakistan, more than offset a 4 percent price/product mix improvement and 2
percent volume growth in the region.
Cost of Sales and Operating Expenses. Cost of sales for 2001 increased 2
percent to $1.59 billion from $1.56 billion in 2000, on sales volume growth of 4
percent. Excluding the effect of non-recurring items, cost of sales increased
approximately 3 percent from 2000, while gross margin declined to 15 percent
from 16 percent in 2000. The reduction in the gross profit margin principally
reflects higher energy costs and lower by-product selling prices, particularly
during the first half of 2001.
SG&A expenses for 2001 increased to $154 million from $139 million in 2000,
due in part to the recording of certain non-recurring costs. Excluding the
non-recurring costs, SG&A expenses totaled $149 million, representing 7.9
percent of net sales, up from 7.5 percent in 2000. This increase resulted mainly
from higher administrative costs and increased general corporate expenses.
Earnings from Non-Consolidated Affiliates and Other Income. Earnings from
non-consolidated affiliates and other income for 2001 increased to $21 million
from $9 million in 2000, primarily due to the recording of our share of the
earnings of CPMCP, partially offset by reduced fee and royalty income.
Additionally, other income for 2001 included a $3 million gain from the
cancellation of a long-term obligation.
26
Operating Income. A summary of operating income is shown below:
<Table>
<Caption>
FAVORABLE FAVORABLE
(UNFAVORABLE) (UNFAVORABLE)
2001 2000 VARIANCE % CHANGE
---- ---- ------------- -------------
(IN MILLIONS)
North America................................ $ 65 $ 77 $(12) (16)%
South America................................ 68 61 7 11%
Asia/Africa.................................. 45 54 (9) (17)%
Corporate expenses........................... (17) (16) (1) (6)%
---- ---- ---- ----
Total........................................ $161 $176 $(15) (9)%
Non-recurring items, net..................... 5 (20) 25 nm*
---- ---- ---- ----
Operating income............................. $166 $156 $ 10 6%
==== ==== ==== ====
</Table>
- ---------------
* nm -- not meaningful
Operating income for 2001 increased 6 percent to $166 million from $156
million in 2000. However, excluding the non-recurring earnings recorded in 2001
and the special charges taken in 2000, operating income declined 9 percent to
$161 million from $176 million in 2000. The decline in operating income reflects
reduced earnings in North America and Asia/Africa of 16 percent and 17 percent,
respectively, which more than offset an 11 percent improvement in South America.
The decrease in North America resulted primarily from higher energy costs and
lower by-product selling prices, particularly during the first half of 2001. The
lower results in Asia/Africa principally reflect unfavorable translation effects
associated with the previously mentioned currency weakness in the region. South
America operating income grew 11 percent as earnings in the Southern Cone of
South America almost doubled from 2000, more than offsetting lower operating
profits in Brazil.
Financing Costs. Financing costs increased to $64 million in 2001 from $54
million in 2000. This increase was primarily due to the recognition of $8
million of foreign currency transaction losses in 2001 ($7 million of which
resulted from the January 6, 2002 devaluation of the Argentine peso), as
compared to foreign currency transaction gains of $1 million in 2000. A decrease
in capitalized interest and higher average outstanding indebtedness due to
acquisition related borrowings, partially offset by lower weighted average
interest rates, also contributed to the increased financing costs.
Provision for Income Taxes. Our effective tax rate was 35 percent for both
2001 and 2000. The tax rates reflect the favorable effect of foreign source
income in countries where tax rates are generally lower than in the United
States.
Minority Interest in Earnings. Minority interest in earnings decreased to
$9 million in 2001 from $18 million in 2000. This decrease mainly reflects the
increase in our ownership interest in Doosan Corn Products Korea, Inc., our
Korean affiliate, from 50 to 75 percent, effective January 2001.
Comprehensive Loss. We recorded a comprehensive loss of $93 million in
2001 compared to a comprehensive loss of $15 million in 2000. The increased loss
principally reflects unfavorable currency translation adjustments and, to a
lesser extent, net losses of $20 million (net of tax effects) on cash flow
hedges. For 2001, we recorded a negative currency translation adjustment of $130
million, compared to a negative currency translation adjustment of $63 million
in 2000. The unfavorable currency translation adjustment for 2001 primarily
reflects the impact of the Argentine currency devaluation and the continued
weakness of other local currencies relative to the U.S. dollar, particularly the
Brazilian Real.
LIQUIDITY & CAPITAL RESOURCES
At December 31, 2002, our total assets were $2.02 billion, down from $2.23
billion at December 31, 2001. This decrease primarily reflects unfavorable
translation effects resulting from the stronger U.S. dollar in relation to
foreign currencies, particularly in Argentina and Brazil. Additionally, improved
working capital
27
management, the sale of EBS and fixed asset depreciation in excess of capital
spending contributed to the decrease in total assets. Stockholders' equity
declined to $828 million at December 31, 2002 from $857 million at December 31,
2001, principally due to unfavorable currency translation effects, which more
than offset net income.
On June 28, 2002, the Company sold $200 million of 8.25 percent senior
notes due July 15, 2007. The net proceeds from the sale of the notes were used
to repay $197 million of borrowings outstanding under our then existing $340
million U.S. revolving credit facility. On October 15, 2002, we entered into a
new 3-year, $125 million revolving credit agreement (the "Revolving Credit
Agreement"). The Revolving Credit Agreement replaced the Company's previously
existing $340 million revolving credit facility, which has been terminated.
Borrowings that had been outstanding under the $340 million revolving credit
facility were repaid with excess cash. On November 18, 2002, the Company sold an
additional $55 million of 8.25 percent senior notes due July 15, 2007. The net
proceeds from the sale of the notes were used to repay indebtedness.
At December 31, 2002, we had total debt outstanding of $600 million,
compared to $756 million at December 31, 2001. The debt outstanding includes
$255 million of 8.25 percent senior notes due 2007, $200 million of 8.45 percent
senior notes due 2009 and $65 million of affiliate long-term debt. The current
portion of long-term debt is $12 million. We also have $72 million of affiliate
short-term borrowings outstanding.
The principal source of our liquidity comes from our internally generated
cash flow, which we supplement as necessary with our ability to raise funds in
both the equity and debt markets. We currently have a shelf registration
statement on file under which we can issue an additional $145 million of debt.
In addition, we have a $125 million revolving credit facility that extends to
October 15, 2005, and under which there were no outstanding borrowings at
December 31, 2002. We also have a total of $360 million of unused operating
lines of credit in the various foreign countries in which we operate.
The weighted average interest rate on total Company indebtedness was
approximately 5.4 percent and 7.1 percent for 2002 and 2001, respectively. On
March 14, 2002, we entered into interest rate swap agreements that effectively
converted the interest rate associated with the Company's 8.45 percent senior
notes to a variable interest rate. The fair value of these agreements at
December 31, 2002 ($27 million) is reflected in the Consolidated Balance Sheet
as an offset to the increase in the fair value of the hedged debt obligation.
Net Cash Flows
A summary of operating cash flows is shown below:
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS)
Net income.................................................. $ 63 $ 57
Depreciation and amortization............................... 103 127
Earnings from non-consolidated affiliates................... (7) (14)
Gain on sale of business.................................... (8) --
Gain on dissolution of business............................. (3) --
Foreign currency transaction (gains) losses................. (1) 8
Deferred taxes.............................................. (6) 2
Minority interest in earnings............................... 12 9
Changes in working capital.................................. 65 (16)
Other....................................................... (12) (2)
---- ----
Cash provided from operations............................. $206 $171
==== ====
</Table>
We generated $206 million of cash from operations in 2002, compared to $171
million last year. This increase primarily reflects a significant improvement in
cash flow pertaining to changes in working capital, compared to last year. The
increased cash flow from working capital changes resulted principally from
28
improved systems and procedures, particularly in the area of trade accounts
receivable collections and accounts payable processing. The cash provided from
operations was used primarily to reduce indebtedness and fund capital
expenditures. Listed below are the Company's primary investing and financing
activities for 2002 (in millions):
<Table>
<Caption>
Capital expenditures........................................ $78
Payments to acquire additional business..................... 42
Proceeds from the sale of EBS............................... 35
Dividends paid (including dividends to minority interest
shareholders)............................................. 19
Payments on debt............................................ 407
Proceeds from borrowings.................................... 263
</Table>
As described in Note 4 of the notes to the consolidated financial
statements, we control approximately 73 percent of our Southern Cone of South
America businesses. The minority interest shareholders of the Company's Southern
Cone of South America businesses have the right to either: (i) require the
Company to sell an amount of shares of the Southern Cone businesses back to the
minority interest shareholders until the minority interest shareholders own 49.5
percent of the Southern Cone businesses; or (ii) require the Company to purchase
the approximately 27 percent ownership interest in the Southern Cone businesses
currently held by the minority interest shareholders. It is anticipated that the
Company will purchase the shares from the minority interest shareholders in
March 2003 at a cost of approximately $52 million.
We expect that our operating cash flows and borrowing availability under
our credit facilities will be more than sufficient to fund our anticipated
capital expenditures, dividends and other investing and/or financing strategies
for the foreseeable future.
KEY PERFORMANCE METRICS
Beginning in 2002 we began using certain key metrics to better monitor our
progress towards achieving our strategic business objectives. These metrics
include the tracking as to whether we are achieving an adequate return on
stockholders' equity through returning our cost of "Capital Employed". We also
monitor our financial leverage by looking at our "Debt to Capitalization Ratio"
to assure that we are properly financed. Other key metrics include "Return on
Net Sales" and "Working Capital as a percentage of Net Sales".
The fundamentals of these key metrics for 2002 with comparison to the prior
year are as follows:
<Table>
<Caption>
RETURN ON CAPITAL EMPLOYED 2002 2001
- -------------------------- ------- -------
($S IN MILLIONS)
Total stockholders' equity.................................. $ 828 $ 857
Add:
Cumulative translation adjustment......................... 407 313
Minority interest in subsidiaries......................... 93 147
Total debt................................................ 600 756
Less:
Cash and cash equivalents................................. (36) (65)
------ ------
Capital employed(a)......................................... $1,892 $2,008
------ ------
Operating income............................................ $ 153 $ 166
Adjusted for:
Income taxes (at rates of 36% and 35%, respectively)...... (55) (58)
------ ------
Adjusted operating income, net of tax(b).................... $ 98 $ 108
------ ------
Return on Capital Employed(b/a)............................. 5.2% 5.4%
====== ======
</Table>
29
<Table>
<Caption>
DEBT TO CAPITALIZATION RATIO 2002 2001
- ---------------------------- ------- -------
($S IN MILLIONS)
Short-term debt............................................. $ 84 $ 444
Long-term debt.............................................. 516 312
------ ------
Total debt(a)............................................. $ 600 $ 756
------ ------
Deferred income tax liabilities............................. $ 163 $ 186
Minority interest in subsidiaries........................... 93 147
Stockholders' equity........................................ 828 857
------ ------
Total capital............................................. $1,084 $1,190
------ ------
Total debt and capital(b)................................... $1,684 $1,946
------ ------
Debt to Capitalization Ratio(a/b)........................... 35.6% 38.8%
====== ======
</Table>
<Table>
<Caption>
RETURN ON NET SALES 2002 2001
- ------------------- ------- -------
($S IN MILLIONS)
Net income.................................................. $ 63 $ 57
Add back:
Minority interest in earnings............................. 12 9
------ ------
Net income before minority interest(a)...................... $ 75 $ 66
------ ------
Net sales(b)................................................ $1,871 $1,887
------ ------
Return on Net Sales(a/b).................................... 4.0% 3.5%
====== ======
</Table>
<Table>
<Caption>
WORKING CAPITAL AS A % OF NET SALES 2002 2001
- ----------------------------------- ------- -------
($S IN MILLIONS)
Current assets.............................................. $ 485 $ 555
Less: current liabilities................................... (347) (675)
------ ------
Working capital............................................. $ 138 $ (120)
Add back:
Short-term debt........................................... 84 444
------ ------
Adjusted working capital(a)................................. $ 222 $ 324
------ ------
Net Sales(b)................................................ $1,871 $1,887
------ ------
Working Capital as a percentage of Net Sales(a/b)........... 11.9% 17.2%
====== ======
</Table>
Commentary on Key Performance Metrics:
In accordance with the Company's long-term objectives, we have set certain
goals relating to key performance metrics that we will endeavor to meet over the
next three to five years. The Company has made progress towards achieving these
goals during 2002. Three of the four performance metrics improved in 2002
despite two significant events that transpired beyond the control of management.
The first was the imposition of a tax on soft drinks sweetened with HFCS in
Mexico that effectively ended the use of HFCS for soft drinks in that country.
The second was the devaluation of currencies in South America that reduced
earnings in dollar terms and significantly reduced the capitalization of the
Company. The effect of the Mexican tax had a significant unfavorable impact on
the Company's earnings for 2002. While the Company believes that the tax will be
rescinded, we are exploring alternative business strategies in the event that
the tax remains in place. The final resolution of this matter could have a
material impact on the attainment of the metrics in the specified time frame.
The Mexican tax event is more fully described in the Recent Developments and
Outlook section of this MD&A.
30
Return on Capital Employed -- Our goal is to achieve a Return on Capital
Employed in excess of 8.5 percent, which is our average Cost of Capital as
calculated based upon our current financing profile. In determining this
performance metric, the negative cumulative translation adjustment is added back
to stockholders' equity to calculate returns based on the Company's original
investment costs. The decline in 2002 to 5.2 percent from 5.4 percent in 2001 is
directly related to the following two events. During 2002 South America
operating income fell 15 percent, primarily due to difficult economic conditions
and weaker currencies in the region. In addition, the discriminatory tax in
Mexico had a significant unfavorable impact on operating income in 2002.
Debt to Capitalization Ratio -- Our goal is to maintain a Debt to
Capitalization Ratio in the range of 32 to 35 percent. During 2002 we improved
this ratio from 38.8 percent at December 31, 2001 to 35.6 percent at December
31, 2002. This was accomplished primarily as a result of strong cash flow
generation, which contributed significantly to the reduction in our adjusted
working capital from $324 million to $222 million. We will strive to maintain
this ratio in the established range as we focus our growth on leveraging our
assets through strategic acquisitions, joint ventures and alliances and selling
those assets that do not meet our long-term strategy.
Return on Net Sales -- Our goal is to improve our Return on Net Sales to
the range of 7 to 9 percent. During 2002 our Return on Net Sales improved from
3.5 percent last year to 4.0 percent in 2002. The improvement primarily reflects
achieved cost reductions. Further improvement is anticipated to result from the
expected restart of our Mexican HFCS business and gains from new products and
customers in both our existing business as well as from geographic expansion and
alliances.
Working Capital as a % of Net Sales -- Our goal is to maintain working
capital in a range of 10 to 12 percent of the Company's net sales. During 2002
we made significant progress in this performance metric through a major
initiative to reduce our working capital. This resulted in a 5 percent
improvement in Working Capital as a Percentage of Net Sales, from just over 17
percent in 2001 to just under 12 percent in 2002.
RISK AND UNCERTAINTIES
The Company operates in one business segment, corn refining, and is managed
on a geographic regional basis. In each country where we conduct business, the
business and assets are subject to varying degrees of risk and uncertainty. We
insure our business and assets in each country against insurable risks in a
manner that our management deems appropriate. Because of our geographic
dispersion, we believe that a loss from non-insurable events in any one country
would not have a material adverse effect on our operations as a whole. We
believe there is no concentration of risk with any single customer or supplier,
or small group of customers or suppliers, whose failure or non-performance would
materially affect our results. We have also established policies to help manage
other financial risks as discussed below.
Commodity Costs. The Company's finished products are made primarily from
corn. Purchased corn accounts for between 40 percent and 65 percent of finished
product costs. In North America, we sell a large portion of our finished product
at firm prices established in supply contracts that typically extend for up to
one year. In order to minimize the effect of volatility in the cost of corn
related to these firm-priced supply contracts, we enter into corn futures
contracts or take hedging positions in the corn futures market. From time to
time, we may also enter into anticipatory hedges. All of these derivative
contracts typically mature within one year. At expiration, we settle the
derivative contracts at a net amount equal to the difference between the
then-current price of corn and the fixed contract price. While these hedging
instruments are subject to fluctuations in value, changes in the value of the
underlying exposures we are hedging generally offset such fluctuations. While
the corn futures contracts or hedging positions are intended to minimize the
volatility of corn costs on operating profits, occasionally the hedging activity
can result in losses, some of which may be material. Outside of North America,
sales of finished product under long-term, firm-priced supply contracts are not
material.
Our hedging instruments generally relate to contracted firm-priced
business. Based on the Company's overall commodity hedge exposure at December
31, 2002, a hypothetical 10 percent change in market rates applied to the fair
value of the instruments would have no material impact on the Company's
earnings, cash
31
flows, financial position or the fair value of commodity price and
risk-sensitive instruments over a one-year period.
International Operations and Foreign Exchange. We have operated a
multinational business subject to the risks inherent in operating in foreign
countries and with foreign currencies for many years. Our non-U.S. operations
are subject to foreign currency exchange fluctuations, as well as to political,
economic and other risks, such as those previously described in the Recent
Developments and Outlook section pertaining to Mexico.
Because we primarily sell world commodities, we believe that local prices
will adjust relatively quickly to offset the effect of a local devaluation. We
may occasionally hedge commercial transactions and certain liabilities that are
denominated in a currency other than the currency of the operating unit entering
into the underlying transaction.
Interest Rate Exposure. Approximately 46 percent of our borrowings are
fixed rate bonds and loans. The remaining 54 percent of our borrowings are at
floating interest rates of which approximately 41 percent are long-term loans
and 13 percent are short-term credit facilities. Should short-term rates change,
this could affect our interest cost. A hypothetical increase of 1 percentage
point in the weighted average floating interest rate for 2002 would have
increased interest expense and reduced pretax income for 2002 by approximately
$2 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from these
estimates under different assumptions and conditions.
The Company's management has identified the most critical accounting
policies upon which the financial statements are based and that involve the most
complex and subjective decisions and assessments. These policies relate to our
major long-lived assets, including the valuation of goodwill and other
intangible assets, and the recognition of depreciation and impairment in the
carrying value of property, plant and equipment. Senior management of the
Company has discussed the development, selection and disclosure of these
policies with members of the Audit Committee of our Board of Directors. These
accounting policies are disclosed in the notes to the consolidated financial
statements. The discussion that follows should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
Annual Report on Form 10-K.
Long-Lived Assets. The Company has substantial investments in property,
plant and equipment and goodwill. For property, plant and equipment we recognize
the cost of depreciable assets in operations over the estimated useful life of
the assets, and we evaluate the recoverability of these assets whenever events
or changes in circumstances indicate that the carrying value of the assets may
not be recoverable. For goodwill we perform an annual impairment assessment (or
more frequently if impairment indicators arise) as required by Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
We have chosen to perform this annual impairment assessment in December of each
year. An impairment loss is assessed and recognized in operating earnings if the
fair value of either goodwill or property, plant and equipment is less than its
carrying amount.
In analyzing the fair value of goodwill and assessing the recoverability of
the carrying value of property, plant and equipment, we have to make projections
regarding future cash flows. In developing these projections, we make a variety
of important assumptions and estimates that have a significant impact on our
assessments of whether the carrying values of goodwill and property, plant and
equipment should be adjusted to reflect impairment. Among these are assumptions
and estimates about the future growth and profitability of the related business
unit, anticipated future economic, regulatory and political conditions in the
business unit's
32
market, the appropriate discount rates relative to the risk profile of the unit
or assets being evaluated and estimates of terminal or disposal values.
We completed the required annual test of goodwill impairment for all of our
affected reporting units in December 2002. In each case, based on our
assumptions about future cash flows we expect to be able to generate from each
reporting unit, the fair value of the reporting unit was in excess of the
related carrying amounts, and accordingly, no impairment of goodwill was
required to be measured and recognized. We also concluded that the Mexican
Congress' December 10, 2002 decision not to repeal the tax on soft drinks
sweetened with HFCS constituted a triggering event which necessitated that we
assess the recoverability of the carrying value of our HFCS production-related
long-term assets in Mexico. We also completed this assessment in December 2002
and concluded, based on our assumptions about future cash flows we expect to be
able to generate from these assets, that their carrying values were not
impaired. For additional information regarding the status of the Mexican
Government's tax on soft drinks sweetened with HFCS, refer to the "Recent
Developments and Outlook" section above and to Note 3 of the notes to the
consolidated financial statements.
Our ability to fully recover the carrying value of our long-term investment
in Mexico, which consists primarily of goodwill and property, plant and
equipment associated with our Mexican operations, is dependent upon the
generation of sufficient cash flows from the use or other disposition of these
assets. The Company's ability to generate these cash flows will be significantly
affected by a variety of factors, including the timing and permanence of any
repeal of the tax on soft drinks sweetened with HFCS, the timing and extent of
any recovery in the demand for HFCS by the Mexican soft drink industry, the
extent to which alternative markets for HFCS develop in and around Mexico, the
success of the Company's restructuring activities in Mexico, and the amount of
the proceeds received from the resolution of the Company's NAFTA claim against
the Government of Mexico, if any, as well as by management's ability to develop
and implement a successful long-term business strategy in Mexico. Based on our
long-term forecasts of operating results, we believe that the Company will
generate sufficient cash flows from the use or other disposition of these
long-term assets to fully recover their carrying values. In developing our
estimates of the cash flows that will be generated from the Company's Mexican
operations, we have assumed that the tax on soft drinks sweetened with HFCS will
be permanently repealed in the near future, and that sales of HFCS to the
Mexican soft drink industry will return to the levels realized prior to the
imposition of the tax by the end of 2003. Under these assumptions about future
HFCS sales in Mexico, the estimated fair value of the Company's Mexican business
exceeds its carrying amount by approximately $90 million. In the event actual
results differ from those assumed, the Company could be required to recognize an
impairment of goodwill and property, plant and equipment, and the amount of such
impairment could be material.
It is reasonably possible that we could have used different assumptions in
making our estimates of future operating results and cash flows in making our
impairment calculations, particularly those related to our Mexican business. For
example, if we assumed that the tax on soft drinks sweetened with HFCS would not
be repealed, our projections of future cash flows in Mexico would be different.
While we believe that the tax will ultimately be repealed, we have nevertheless
begun to develop an alternative business strategy with respect to our Mexican
operations in the less likely event the tax is not rescinded. This strategy
includes, among other things, the following: (i) developing new uses and new
customers for HFCS; (ii) increasing sales of our current product portfolio, as
well as developing new products for the region; (iii) investing capital to
increase production output for current and new products; (iv) the potential
transfer of certain HFCS equipment to plants outside of Mexico; and (v)
continuing our cost reduction program. Based on our projections of operating
results and cash flows that would be generated under this alternative business
model for our Mexican operations, we may be required to record an impairment
charge to write-down the carrying value of goodwill in the event the tax is not
repealed. These assumptions are subject to change based on business conditions
and the results of the impairment calculations could be significantly different
if performed at a later date.
In concluding that an impairment of our Mexican goodwill may arise if the
tax is not repealed, we assumed that no proceeds will be received from our claim
for compensation under NAFTA against the Mexican Government. Any recovery we
receive from the resolution of this claim would reduce the amount of
33
any impairment to be recognized. However, no assurance can be made that we will
be successful in either asserting our claim or in recovering damages.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which
addresses financial accounting and reporting for legal obligations associated
with the retirement of tangible long-lived assets and the related asset
retirement costs. The Company is required to adopt SFAS 143 effective January 1,
2003. The adoption of SFAS 143 is not expected to have a significant effect on
the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS 146 replaces EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 is required to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. The adoption of SFAS 146 is not expected to have a significant effect
on the Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), which addresses financial
accounting and reporting for obligations under certain guarantees. FIN 45
requires, among other things, that a guarantor recognize a liability for the
fair value of an obligation undertaken in issuing a guarantee, under certain
circumstances. The recognition and measurement provisions of FIN 45 are required
to be applied prospectively to guarantees issued or modified after December 31,
2002. The adoption of FIN 45 is not expected to have a significant effect on the
Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS 148"). SFAS 148 amends SFAS 123 to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements for SFAS 123 to require prominent disclosures in both annual and
interim financial statements. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002 and are included in the
notes to the consolidated financial statements included elsewhere in this
report.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which
addresses the consolidation of variable interest entities as defined in the
Interpretation. FIN 46 applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests in
variable interest entities obtained after January 31, 2003. The application of
FIN 46 is not expected to have a material effect on the Company's consolidated
financial statements.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains or may contain forward-looking
statements concerning the Company's financial position, business and future
earnings and prospects, in addition to other statements using words such as
anticipate, believe, plan, estimate, expect, intend and other similar
expressions. These statements contain certain inherent risks and uncertainties.
Although we believe our expectations reflected in these forward-looking
statements are based on reasonable assumptions, stockholders are cautioned that
no assurance can be given that our expectations will prove correct. Actual
results and developments may differ materially from the expectations conveyed in
these statements, based on factors such as the following: fluctuations in
worldwide commodities markets and the associated risks of hedging against such
fluctuations; fluctuations in aggregate industry supply and market demand;
general political, economic, business, market and weather conditions in the
various geographic regions and countries in which we manufacture and sell our
products, including fluctuations in the value of local currencies, energy costs
and availability and changes in regulatory controls regarding quotas, tariffs,
taxes and biotechnology issues; increased competitive and/or
34
customer pressure in the corn-refining industry; the outbreak or continuation of
hostilities; and stock market fluctuation and volatility. 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. 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 risk factors, see the Company's most recently filed Annual Report
on Form 10-K and subsequent reports on Forms 10-Q or 8-K.
35
REPORT OF MANAGEMENT
THE MANAGEMENT OF CORN PRODUCTS INTERNATIONAL, INC. is responsible for the
financial and operating information contained in this Annual Report on Form
10-K, including the consolidated financial statements covered by the independent
auditors' report. These financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America and
include, where necessary, informed estimates and judgements.
The Company maintains systems of accounting, disclosure and internal
control designed to provide reasonable assurance that assets are safeguarded
against loss, and that transactions are executed and recorded properly so as to
ensure that the financial records are reliable for preparing financial
statements and that the financial statements and disclosures are accurately
reported.
Elements of these control systems include the establishment and
communication of accounting and administrative policies and procedures, the
selection and training of qualified personnel and a continuous program of
internal audit.
The Company's consolidated financial statements are reviewed by its Audit
Committee, which is composed entirely of independent outside directors. This
Committee meets regularly with management, the Company's internal auditors and
with the independent auditors to review the scope and results of the annual
audit and interim reviews, to discuss their evaluation of internal controls and
the quality of financial reporting, and to carry out the Audit Committee's
oversight role with respect to internal auditing, internal controls and
financial reporting matters. Both the independent auditors and the internal
auditors meet privately with, and have direct access to, the Audit Committee to
discuss the results of their audits.
James W. Ripley
Chief Financial Officer
January 28, 2003
36
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Corn Products International, Inc.:
We have audited the accompanying consolidated balance sheets of Corn
Products International, Inc. and its subsidiaries (the "Company") as of December
31, 2002 and 2001, and the related consolidated statements of income,
comprehensive income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Corn
Products International, Inc. and its subsidiaries as of December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As described in Note 2 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standard (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as of January 1,
2001 and SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1,
2002.
KPMG LLP
Chicago, Illinois
January 28, 2003
37
CORN PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
FOR THE YEAR ENDED DECEMBER 31, 2002
38
CORN PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
Net sales before shipping and handling costs................ $1,979 $2,034 $2,036
Less -- shipping and handling costs......................... 108 147 171
------ ------ ------
Net sales................................................... 1,871 1,887 1,865
Cost of sales............................................... 1,604 1,588 1,559
------ ------ ------
GROSS PROFIT................................................ 267 299 306
------ ------ ------
Selling, general and administrative costs................... 134 154 139
Special charges............................................. -- -- 20
Earnings from non-consolidated affiliates and other
income.................................................... (20) (21) (9)
------ ------ ------
114 133 150
------ ------ ------
OPERATING INCOME............................................ 153 166 156
Financing costs -- net...................................... 36 64 54
------ ------ ------
Income before income taxes and minority interest............ 117 102 102
Provision for income taxes.................................. 42 36 36
Minority interest in earnings............................... 12 9 18
------ ------ ------
NET INCOME.................................................. $ 63 $ 57 $ 48
====== ====== ======
Weighted average common shares outstanding:
Basic..................................................... 35.6 35.3 35.3
Diluted................................................... 35.7 35.5 35.3
Earnings per common share:
Basic..................................................... $ 1.78 $ 1.60 $ 1.35
Diluted................................................... 1.77 1.60 1.35
</Table>
See notes to the consolidated financial statements.
39
CORN PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AS OF DECEMBER 31,
--------------------------
2002 2001
----------- -----------
(IN MILLIONS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 36 $ 65
Accounts receivable -- net............................. 244 279
Inventories............................................ 194 201
Prepaid expenses....................................... 11 10
------- -------
TOTAL CURRENT ASSETS...................................... 485 555
------- -------
Property, plant and equipment, at cost
Land................................................... 97 92
Buildings.............................................. 286 326
Machinery and equipment................................ 2,203 2,328
------- -------
2,586 2,746
Less accumulated depreciation.......................... (1,432) (1,453)
------- -------
1,154 1,293
Goodwill and other intangible assets (less accumulated
amortization of $27 and $26)........................... 280 283
Deferred tax assets....................................... 33 20
Investments............................................... 26 41
Other assets.............................................. 37 35
------- -------
TOTAL ASSETS.............................................. $ 2,015 $ 2,227
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and current portion of long-term
debt.................................................. $ 84 $ 444
Accounts payable....................................... 164 143
Accrued liabilities.................................... 99 88
------- -------
TOTAL CURRENT LIABILITIES................................. 347 675
------- -------
Non-current liabilities................................... 68 50
Long-term debt............................................ 516 312
Deferred income taxes..................................... 163 186
Minority interest in subsidiaries......................... 93 147
STOCKHOLDERS' EQUITY
Preferred stock -- authorized 25,000,000
shares -- $0.01 par value, none issued................ -- --
Common stock -- authorized 200,000,000 shares -- $0.01
par value -- 37,659,887 issued at December 31, 2002
and 2001.............................................. 1 1
Additional paid-in capital............................. 1,073 1,073
Less: Treasury stock (common stock; 1,956,113 and
2,253,578 shares in 2002 and 2001, respectively) at
cost.................................................. (48) (56)
Deferred compensation -- restricted stock.............. (4) (3)
Accumulated other comprehensive loss................... (418) (333)
Retained earnings...................................... 224 175
------- -------
TOTAL STOCKHOLDERS' EQUITY................................ 828 857
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $ 2,015 $ 2,227
======= =======
</Table>
See notes to the consolidated financial statements.
40
CORN PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------
2002 2001 2000
------ ------- ------
(IN MILLIONS)
NET INCOME.................................................. $ 63 $ 57 $ 48
Other comprehensive income (loss):
Gain (loss) on cash flow hedges:
Cumulative effect of adoption of SFAS 133, net of
income taxes of $8 million............................ -- 14 --
Unrealized gains (losses) on cash flow hedges, net of
income tax effect of $2 million and $11 million,
respectively.......................................... (4) (21) --
Amount of (gains) losses on cash flow hedges
reclassified to earnings, net of income tax effect of
$8 million and $7 million, respectively............... 14 (13) --
Currency translation adjustment........................... (94) (130) (63)
Minimum pension liability, net of income tax effect....... (1) -- --
---- ----- ----
COMPREHENSIVE LOSS.......................................... $(22) $ (93) $(15)
==== ===== ====
</Table>
See notes to the consolidated financial statements.
41
CORN PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN TREASURY DEFERRED COMPREHENSIVE RETAINED
STOCK CAPITAL STOCK COMPENSATION INCOME (LOSS) EARNINGS
------ ---------- -------- ------------ ------------- --------
(IN MILLIONS)
BALANCE, DECEMBER 31, 1999..................... $1 $1,073 $(20) $(2) $(120) $ 98
== ====== ==== === ===== ====
Net income................................... 48
Dividends declared........................... (14)
Issuance of restricted common stock as
compensation............................... 1 (1)
Issuance of common stock in connection with
acquisition................................ 3
Purchase of treasury stock................... (44)
Currency translation adjustment.............. (63)
-- ------ ---- --- ----- ----
BALANCE, DECEMBER 31, 2000..................... $1 $1,073 $(60) $(3) $(183) $132
== ====== ==== === ===== ====
Net income................................... 57
Dividends declared........................... (14)
Cumulative effect of adoption of SFAS 133,
net of income taxes of $8 million.......... 14
Unrealized gains (losses) on cash flow
hedges, net of income tax effect of $11
million.................................... (21)
Amount of (gains) losses on cash flow hedges
reclassified to earnings, net of income tax
effect of $7 million....................... (13)
Issuance of common stock on exercise of stock
options.................................... 4
Currency translation adjustment.............. (130)
-- ------ ---- --- ----- ----
BALANCE, DECEMBER 31, 2001..................... $1 $1,073 $(56) $(3) $(333) $175
== ====== ==== === ===== ====
Net income................................... 63
Dividends declared........................... (14)
Unrealized gains (losses) on cash flow
hedges, net of income tax effect of $2
million.................................... (4)
Amount of (gains) losses on cash flow hedges
reclassified to earnings, net of income tax
effect of $8 million....................... 14
Issuance of common stock in connection with
acquisition................................ 2
Issuance of restricted common stock as
compensation............................... 2 (2)
Amortization to compensation expense of
restricted common stock.................... 1
Issuance of common stock on exercise of stock
options.................................... 4
Currency translation adjustment.............. (94)
Minimum pension liability, net of income tax
effect..................................... (1)
-- ------ ---- --- ----- ----
BALANCE, DECEMBER 31, 2002..................... $1 $1,073 $(48) $(4) $(418) $224
== ====== ==== === ===== ====
</Table>
See notes to the consolidated financial statements.
42
CORN PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income................................................ $ 63 $ 57 $ 48
Non-cash charges (credits) to net income:
Depreciation and amortization.......................... 103 127 135
Deferred income taxes.................................. (6) 2 15
Minority interest in earnings.......................... 12 9 18
Earnings from non-consolidated affiliates.............. (7) (14) (1)
Gain on sale of business............................... (8) -- --
Gain on dissolution of business........................ (3) -- --
Foreign currency transaction (gains) losses............ (1) 8 (1)
Changes in trade working capital:
Accounts receivable and prepaid expenses............... 9 (30) 3
Inventories............................................ (6) 20 (12)
Accounts payable and accrued liabilities............... 62 (6) 8
Other..................................................... (12) (2) (25)
----- ----- -----
Cash provided by operating activities..................... 206 171 188
----- ----- -----
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Capital expenditures...................................... (78) (94) (143)
Proceeds from disposal of plants and properties........... 1 2 1
Proceeds from sale of business............................ 35 -- --
Proceeds from dissolution of business..................... 11 -- --
Payments for acquisitions, net of cash acquired........... (42) (79) (120)
----- ----- -----
Cash used for investing activities........................ (73) (171) (262)
----- ----- -----
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Payments on debt.......................................... (407) (83) (135)
Proceeds from borrowings.................................. 263 129 267
Dividends paid (including to minority interest
shareholders).......................................... (19) (23) (14)
Issuance (repurchase) of common stock..................... 4 4 (44)
----- ----- -----
Cash (used for) provided by financing activities.......... (159) 27 74
----- ----- -----
Effects of foreign exchange rate changes on cash.......... (3) (3) --
----- ----- -----
Increase (decrease) in cash and cash equivalents.......... (29) 24 --
Cash and cash equivalents, beginning of period............ 65 41 41
----- ----- -----
Cash and cash equivalents, end of period.................. $ 36 $ 65 $ 41
===== ===== =====
</Table>
See notes to the consolidated financial statements.
43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF THE BUSINESS
Corn Products International, Inc. (the "Company") was founded in 1906 and
became an independent and public company as of December 31, 1997, after being
spun off from CPC International Inc. ("CPC"). The Company operates domestically
and internationally in one business segment, corn refining, and produces a wide
variety of products.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation -- The consolidated financial statements consist of
the accounts of the Company, including all significant subsidiaries.
Intercompany accounts and transactions are eliminated in consolidation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Certain prior year amounts have been reclassified to conform with the
current year's presentation. These reclassifications had no effect on previously
recorded net income or stockholders' equity.
Assets and liabilities of foreign subsidiaries, other than those whose
functional currency is the U.S. dollar, are translated at current exchange rates
with the related translation adjustments reported in stockholders' equity as a
component of accumulated other comprehensive income (loss). Income statement
accounts are translated at the average exchange rate during the period. Where
the U.S. dollar is considered the functional currency, monetary assets and
liabilities are translated at current exchange rates with the related adjustment
included in net income. Non-monetary assets and liabilities are translated at
historical exchange rates. The Company incurs foreign currency transaction
gains/losses relating to assets and liabilities that are denominated in a
currency other than the functional currency. For 2002, 2001 and 2000 the Company
incurred foreign currency transaction (gains) losses of ($1 million), $8 million
and ($1 million), respectively.
Cash and cash equivalents -- Cash equivalents consist of all instruments
purchased with an original maturity of three months or less, and which have
virtually no risk of loss in value.
Inventories -- Inventories are stated at the lower of cost or net
realizable value. Costs are determined using the first-in, first-out (FIFO)
method.
Investments -- Investments in the common stock of affiliated companies over
which the Company does not exercise significant influence are accounted for
under the cost method and are carried at cost or less. Investments that enable
the Company to exercise significant influence, but do not represent a
controlling interest, are accounted for under the equity method; such
investments are carried at cost or less, adjusted to reflect the Company's
proportionate share of income or loss, less dividends received. The Company
would recognize a loss on these investments when there is a loss in value of an
investment which is other than a temporary decline.
Property, plant and equipment and depreciation -- Property, plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
generally computed on the straight-line method over the estimated useful lives
of depreciable assets, which range from 10 to 50 years for buildings and 3 to 20
years for all other assets. Where permitted by law, accelerated depreciation
methods are used for tax purposes. The Company reviews the recoverability of the
net book value of property, plant and equipment for impairment whenever events
and circumstances indicate that the net book value of an asset may not be
recoverable from estimated future cash flows expected to result from its use and
eventual disposition. If this review indicates that the carrying values will not
be recovered, the carrying values would be reduced and an impairment loss would
be recognized.
44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and other intangible assets -- Goodwill ($277 million at December
31, 2002) represents the excess of cost over fair value of net assets acquired.
The Company also has a $3 million intangible asset related to the recognition of
a minimum pension liability at December 31, 2002. The carrying amount of
goodwill and other intangible assets by geographic segment as of December 31,
2002 was as follows:
<Table>
<Caption>
(IN MILLIONS)
North America............................................... $122
South America............................................... 21
Asia/Africa................................................. 137
----
Total....................................................... $280
====
</Table>
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"), which supersedes APB Opinion No. 17, "Intangible Assets". SFAS 142
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. SFAS 142 also
addresses how goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements. SFAS 142
stipulates that goodwill should no longer be amortized and should instead be
subject to an annual (or more frequent if impairment indicators arise)
impairment assessment. Upon adoption of SFAS 142, the Company completed the
transitional impairment test required by the statement. The Company has
established December 31 as the date of its annual test for impairment of
goodwill. Based upon the transitional and annual impairment tests completed
during 2002, the Company concluded that the balance of goodwill is fully
recoverable and no impairment loss was required to be recognized.
The adoption of SFAS 142's provisions relating to goodwill amortization
resulted in the Company discontinuing the amortization of goodwill beginning
January 1, 2002. Prior to the adoption of SFAS 142, goodwill was amortized using
the straight-line method over its estimated useful or legal life, not to exceed
40 years. On a pretax basis, the Company recorded goodwill amortization of $12
million in each of 2001 and 2000. On an after-tax basis, goodwill amortization
was $8 million in both 2001 and 2000. The following table provides a comparison
of the effects of adopting SFAS 142 for the years ended December 31, 2002, 2001
and 2000:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE)
Net income................................................. $ 63 $ 57 $ 48
Add back: goodwill amortization (net of income taxes)...... -- 8 8
----- ----- -----
Adjusted net income........................................ $ 63 $ 65 $ 56
===== ===== =====
Diluted earnings per common share:
As reported earnings per share............................. $1.77 $1.60 $1.35
Add back: goodwill amortization (net of income taxes)...... -- 0.21 0.23
----- ----- -----
Adjusted earnings per share................................ $1.77 $1.81 $1.58
===== ===== =====
</Table>
Revenue recognition -- The Company recognizes operating revenues at the
time title to the goods and all risks of ownership transfer to customers. This
generally occurs upon the date of shipment, except in the case of consigned
inventories where title passes and the transfer of ownership risk occurs when
the goods are used by the customer.
Hedging instruments -- Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain
45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hedging Activities, an Amendment of SFAS 133" ("SFAS 138"). SFAS 133 and 138
establish standards for recognition and measurement of derivatives and hedging
activities and require that all derivative instruments be recorded on the
balance sheet at their respective fair values. Upon adoption, the Company
recorded a cumulative effect type credit of $14 million (net of income taxes of
$8 million) to other comprehensive income (loss), to recognize at fair value all
derivatives that were designated as hedges of variable cash flows of certain
forecasted transactions. Gains and losses on derivatives that were previously
deferred as adjustments to the carrying amount of hedged items were not
adjusted.
The Company uses derivative financial instruments principally to offset
exposure to market risks arising from changes in commodity prices and interest
rates. Derivative financial instruments currently used by the Company consist of
commodity futures contracts and interest rate swap agreements. The Company
enters into futures contracts, which are designated as hedges of specific
volumes of commodities (corn and natural gas) that will be purchased and
processed in a future month. These readily marketable exchange-traded futures
contracts are recognized in the Consolidated Balance Sheets at fair value. The
Company has also entered into interest rate swap agreements to take advantage of
the current interest rate environment by effectively converting the interest
rate on certain fixed rate debt to a variable rate. The fair value of these
interest rate swap agreements is recognized in the Consolidated Balance Sheet as
an offset to the increase to the fair value of the hedged debt obligation.
On the date a derivative contract is entered into, the Company designates
the derivative as either a hedge of variable cash flows to be paid related to
certain forecasted purchases of corn or natural gas used in the manufacturing
process ("a cash-flow hedge") or as a hedge of the fair value of certain fixed
rate debt obligations ("a fair-value hedge"). This process includes linking all
derivatives that are designated as fair-value or cash-flow hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. For all hedging relationships, the Company formally
documents the hedging relationships and its risk-management objective and
strategy for undertaking the hedge transactions, the hedging instrument, the
item, the nature of the risk being hedged, how the hedging instrument's
effectiveness in offsetting the hedged risk will be assessed, and a description
of the method of measuring ineffectiveness. This includes linking all
derivatives that are designated as cash-flow or fair-value hedges to specific
forecasted transactions or to specific assets and liabilities on the
Consolidated Balance Sheet. The Company also formally assesses, both at the
hedge's inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in cash flows
or fair values of hedged items. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly effective
hedge, the Company discontinues hedge accounting prospectively.
Changes in the fair value of a futures contract that is highly effective
and that is designated and qualifies as a cash-flow hedge are recorded in other
comprehensive income, net of applicable income taxes, and recognized in the
Consolidated Statement of Income when the finished goods produced using the
hedged item are sold. The maximum term over which the Company hedges exposures
to the variability of cash flows for commodity price risk is 12 months. Changes
in the fair value of an interest rate swap agreement that is highly effective
and that is designated and qualifies as a fair-value hedge, along with the loss
or gain on the hedged debt obligation that is attributable to the hedged risk,
are recorded in earnings. The ineffective portion of the change in fair value of
a derivative instrument that qualifies as either a cash-flow hedge or a
fair-value hedge is reported in earnings.
The Company discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in offsetting changes in
the cash flows or fair value of the hedged item, the derivative expires or is
sold, terminated or exercised, the derivative is de-designated as a hedging
instrument because it is unlikely that a forecasted transaction will occur, or
management determines that designation of the derivative as a hedging instrument
is no longer appropriate. When hedge accounting is discontinued because it is
probable that a forecasted transaction will not occur, the Company continues to
carry the derivative on the Consolidated Balance Sheet at its fair value, and
gains and losses that were accumulated in other comprehensive income are
recognized immediately in earnings. When hedge accounting is discontinued
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
because it is determined that the derivative no longer qualifies as an effective
fair-value hedge, the Company continues to carry the derivative on the
Consolidated Balance Sheet at its fair value and no longer adjusts the hedged
asset or liability for changes in fair value. The adjustment of the carrying
amount of the hedged asset or liability is accounted for in the same manner as
other components of the carrying amount of that asset or liability. In all other
situations in which hedge accounting is discontinued, the Company continues to
carry the derivative at its fair value on the Consolidated Balance Sheet and
recognizes any changes in its fair value in earnings.
Stock-based compensation -- The Company has a stock incentive plan that
provides for stock-based employee compensation, including the granting of stock
options and shares of restricted stock, to certain key employees. The plan is
more fully described in Note 13. The Company accounts for the stock incentive
plan in accordance with the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. Under this method, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. Under the Company's stock incentive plan, stock options are
granted at exercise prices that equal the market value of the underlying common
stock on the date of grant. Therefore, no compensation expense related to stock
options is recorded in the Consolidated Statements of Income.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation plans. As allowed by SFAS 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS 123. The
following table illustrates the effect on net income and earnings per share if
the fair-value-based recognition provisions of SFAS 123 had been applied to all
outstanding and unvested awards in each period:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE)
Net income, as reported.................................... $ 63 $ 57 $ 48
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects............................... (1) (3) (4)
----- ----- -----
Pro forma net income....................................... $ 62 $ 54 $ 44
===== ===== =====
Earnings per share:
Basic -- as reported....................................... $1.78 $1.60 $1.35
Basic -- pro forma......................................... $1.74 $1.52 $1.25
Diluted -- as reported..................................... $1.77 $1.60 $1.35
Diluted -- pro forma....................................... $1.73 $1.52 $1.25
</Table>
Earnings per common share -- Basic earnings per common share is computed by
dividing net income by the weighted average number of shares outstanding, which
totaled 35.6 million for 2002 and 35.3 million for 2001 and 2000. Diluted
earnings per share (EPS) is computed by dividing net income by the weighted
average number of shares outstanding, including the dilutive effect of stock
options outstanding. The weighted average number of shares outstanding for
diluted EPS calculations were 35.7 million, 35.5 million and 35.3 million for
2002, 2001 and 2000, respectively. In 2002, 2001 and 2000, options to purchase
975,166, 1,001,666 and 1,829,366 shares of common stock, respectively, were
excluded from the calculation of the weighted average number of shares
outstanding for diluted EPS because their effects were anti-dilutive.
Risks and uncertainties -- The Company operates domestically and
internationally in one business segment. In each country, the business and
assets are subject to varying degrees of risk and uncertainty. The
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company insures its business and assets in each country against insurable risks
in a manner that it deems appropriate. Because of this geographic dispersion,
the Company believes that a loss from non-insurable events in any one country
would not have a material adverse effect on the Company's operations as a whole.
Additionally, the Company believes there is no significant concentration of risk
with any single customer or supplier, or small group of customers or suppliers,
whose failure or non-performance would materially affect the Company's results.
Recently issued accounting standards -- In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting For Asset
Retirement Obligations" ("SFAS 143"), which addresses accounting and reporting
for asset retirement obligations. SFAS 143 will require the Company to record
the fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that results from the acquisition, construction, development,
and/or normal use of the assets. The Company will also record a corresponding
asset that will be depreciated over the life of the related asset. Subsequent to
the initial measurement of the asset retirement obligation, the obligation will
be adjusted at the end of each period to reflect the passage of time and changes
in the estimated future cash flows underlying the obligation. The Company is
required to adopt SFAS 143 on January 1, 2003. The adoption of SFAS 143 is not
excepted to have a material effect on the Company's consolidated financial
statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS 146 replaces EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 is required to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. The adoption of SFAS 146 is not expected to have a material effect of
the Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), which addresses financial
accounting and reporting for obligations under certain guarantees. FIN 45
requires, among other things, that a guarantor recognize a liability for the
fair value of an obligation undertaken in issuing a guarantee, under certain
circumstances. The recognition and measurement provisions of FIN 45 are required
to be applied prospectively to guarantees issued or modified after December 31,
2002. The adoption of FIN 45 is not expected to have a significant effect on the
Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS 148"). This Statement amends SFAS 123 to provide alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which
addresses the consolidation of variable interest entities as defined in the
Interpretation. FIN 46 applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests in
variable interest entities obtained after January 31, 2003. The application of
FIN 46 is not expected to have a material effect on the Company's consolidated
financial statements.
NOTE 3 -- MEXICAN TAX ON BEVERAGES SWEETENED WITH HFCS
On January 1, 2002, a discriminatory tax on soft drinks sweetened with high
fructose corn syrup ("HFCS") approved by the Mexican Congress late in 2001,
became effective. This tax was temporarily
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
suspended on March 5, 2002. In response to the enactment of the tax, which at
the time effectively ended the use of HFCS for soft drinks in Mexico, the
Company ceased production of HFCS 55 at its San Juan del Rio plant, one of its
four plants in Mexico. Effective with the March 5, 2002 suspension of the tax,
the Company resumed the production and sale of HFCS in Mexico, although at
levels below historical volumes. On July 12, 2002, the Mexican Supreme Court
annulled the temporary suspension of the tax, thereby resuming the tax, and the
Company curtailed the production of HFCS 55 at its San Juan del Rio plant. On
December 10, 2002, the Mexican Congress declined to repeal the controversial tax
on soft drinks sweetened with HFCS.
The Company is disappointed with the Mexican Congress' decision to retain
the imposition of the tax on soft drinks sweetened with HFCS. However, the
Company continues to explore all options for resolving the situation and
minimizing any potential long-term negative financial impact that might occur.
The Company has engaged in discussions regarding the matter with both U.S. and
Mexican government trade officials, and has received informal assurances from
both sides that repeal of the tax is a condition precedent to resolving certain
trade issues between the countries. These same officials have also implied that
a resolution of these matters is expected in the near term. However, the Company
cannot predict with any certainty whether these trade matters will ultimately be
resolved, or the likelihood or timing of repeal of the tax on soft drinks
sweetened with HFCS. In the meantime, the Company is attempting to mitigate the
negative effects of the tax on HFCS demand in Mexico by exploring other markets
for its HFCS production capability in and around Mexico. The Company is also
continuing the restructuring of its Mexican operations in an effort to improve
efficiency and reduce operating costs. The Company also initiated formal action
to seek compensation for damage to its Mexican operations under the provisions
of the North American Free Trade Agreement (NAFTA).
On January 28, 2003, the Company notified the Government of Mexico of its
intention to submit to arbitration a claim for compensation under the investment
provisions of the NAFTA. The Company believes that the Government of Mexico has
violated certain of its obligations with respect to foreign investors under the
NAFTA, including those regarding non-discriminatory treatment and
expropriations. The claim, which approximates $250 million, seeks compensation
for the Company's costs for past and potential lost profits and other costs
related to its operations in Mexico, as well as the Company's costs in pursuing
resolution of this matter. The filing of the notice of intent is the first step
in pursuing the resolution of an investment dispute. The NAFTA requires the
Company to serve written notice of its intention to make a claim at least three
months prior to submitting the claim to arbitration. Pursuant to the process,
the Company and the Government of Mexico must continue to attempt to resolve the
situation through consultation or negotiation during this period.
Until there is a favorable resolution of the Mexican tax on soft drinks
sweetened with HFCS, the Company expects that it will be unable to make any
significant sales of HFCS to the soft drink industry in Mexico. Management
continues to seek a permanent repeal of the tax and currently believes that the
matter will ultimately be resolved through negotiations between the governments
of the United States and Mexico. Until that occurs, however, the Company's
operating results and cash flows will continue to be adversely affected by the
Mexican tax on soft drinks sweetened with HFCS.
The Company's ability to fully recover the carrying value of its long-term
investment in Mexico, which consists primarily of goodwill and property, plant
and equipment associated with its Mexican operations, is dependent upon the
generation of sufficient cash flows from the use or other disposition of these
assets. The Company's ability to generate these cash flows will be significantly
affected by a variety of factors, including the timing and permanence of any
repeal of the tax on soft drinks sweetened with HFCS, the timing and extent of
any recovery in the demand for HFCS by the Mexican soft drink industry, the
extent to which alternative markets for HFCS develop in and around Mexico, the
success of the Company's restructuring activities in Mexico, and the amount of
proceeds received from the resolution of the Company's NAFTA claim against the
Government of Mexico, if any, as well as by management's ability to develop and
implement a successful long-term business strategy in Mexico. Based on long-term
forecasts of operating results, management believes that the Company will
generate sufficient cash flows from the use or other disposition of
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these long-term assets to fully recover their carrying values, and accordingly,
no impairment of either goodwill or other long-term assets related to Mexico was
recognized as of December 31, 2002. In developing its estimate of the cash flows
that will be generated from the Company's Mexican operations, management has
assumed that the tax on soft drinks sweetened with HFCS will be permanently
repealed in the near future and that sales of HFCS to the Mexican soft drink
industry will return to the levels realized prior to the imposition of the tax
by the end of 2003. Under these assumptions about future HFCS sales in Mexico,
the estimated fair value of the Company's Mexican business exceeds its carrying
amount by approximately $90 million. In the event actual results differ from
those assumed, the Company could be required to recognize an impairment of
goodwill and property, plant and equipment, and the amount of such impairment
could be material.
NOTE 4 -- ACQUISITIONS/DISPOSITION
On February 5, 2002, the Company sold its interest in Enzyme Bio-Systems
Ltd. of Beloit, Wisconsin ("EBS") for approximately $35 million in cash. The
Company recorded a pretax gain from the sale of approximately $8 million, which
is included in other income in the 2002 Consolidated Statement of Income.
In October 1998, the Company entered into certain agreements to purchase
its then 49 percent owned non-consolidated affiliate, Arancia S.A. de C.V.
("Arancia"), in a series of three transactions that would be completed over the
next several years. In accordance with the agreements, on December 2, 1998 the
Company completed the first in the series of transactions by acquiring a
controlling interest in Arancia and began to consolidate this business in its
financial statements. On January 18, 2000, the Company completed the second in
the series of transactions by increasing its ownership in Arancia to 90 percent
for consideration of $41 million, consisting of cash and common stock. On March
4, 2002, the Company increased its ownership in Arancia from 90 percent to 100
percent by paying $39 million in cash and issuing 70,000 shares of common stock
valued at $2 million.
During 2000, the Company completed a multi-step transaction that resulted
in the acquisition of a controlling interest in Industrias de Maiz S.A.
("IMASA") of Argentina. As a result of the transaction, the Company has control
of approximately 73 percent of its Southern Cone of South America businesses,
which include IMASA, Productos de Maiz of Argentina, and its businesses in Chile
and Uruguay. The Company paid $83 million in cash to acquire net assets with a
fair value of $14 million, consisting of $124 million of assets and $110 million
of liabilities. Goodwill of $69 million was recorded in connection with the
transaction. The minority interest shareholders have the right to either: (i)
require the Company to sell an amount of shares of the Southern Cone businesses
back to the minority interest shareholders until the minority interest
shareholders own 49.5 percent of the Southern Cone businesses; or (ii) require
the Company to purchase the approximately 27 percent ownership interest in the
Southern Cone businesses currently held by the minority interest shareholders.
It is anticipated that the Company will purchase the shares from the minority
interest shareholders in March 2003 at a cost of approximately $52 million.
On January 5, 2001, the Company increased its ownership interest in Doosan
Corn Products Korea, Inc. ("DCPK"), its consolidated Korean subsidiary, from 50
percent to 75 percent for $65 million in cash. The Company recorded $10 million
of goodwill related to this purchase. The Company accounts for its Korean
operations as a consolidated subsidiary as it has a controlling interest in
DCPK. Beginning in 2005, the Company will have the option to acquire, and the
minority interest shareholder will have the right to require the Company to
acquire, the 25 percent ownership interest in DCPK currently held by the
minority interest shareholder.
On March 2, 2001, the Company acquired a controlling 60 percent interest in
a small starch and sweetener company in Thailand. In 2002, the Company increased
its ownership interest in this business to approximately 83 percent.
All of the Company's acquisitions were accounted for under the purchase
method. Had the acquisitions/disposition described above occurred at the
beginning of the respective years, the effect on the Company's consolidated
financial statements would not have been significant.
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- JOINT MARKETING COMPANY
On December 1, 2000, the Company and Minnesota Corn Processors, LLC ("MCP")
consummated an operating agreement to form CornProductsMCP Sweeteners LLC
("CPMCP"), a joint marketing company that, effective January 1, 2001, began
distributing throughout the United States sweeteners supplied from the Company
and MCP. On July 11, 2002, MCP announced that it had signed a merger agreement
with Archer-Daniels-Midland Company ("ADM"), whereby MCP would merge with a
subsidiary of ADM. The consummation of the merger was subject to a number of
conditions, including approval from the unit holders of MCP and various
regulatory agencies. On September 5, 2002, the unit holders of MCP approved the
proposed sale. Shortly thereafter, the United States Justice Department's
Antitrust Division filed a lawsuit in U.S. District Court, formally blocking the
proposed transaction, and simultaneously also filed a consent decree approving
the sale if CPMCP was dissolved by December 31, 2002.
On September 6, 2002, the Company was notified of MCP's desire to dissolve
CPMCP effective December 31, 2002. On December 27, 2002 the Company and MCP
agreed in principle to a plan of dissolution that would allow for the orderly
wind up of CPMCP's activities. Under the terms of the plan of dissolution, MCP
agreed to pay the Company an $11 million termination fee as required under the
terms of the CPMCP Limited Liability Company Agreement between the Company and
MCP dated December 1, 2000. This payment was received by the Company on December
31, 2002. In addition, the Company recorded an $8 million charge for its share
of costs incurred relating to the dissolution. These expenses consist primarily
of direct incremental costs incurred by CPMCP as a result of the dissolution,
including expenses related to the termination of employees, early termination of
leases, losses on the disposition of assets and other wind-down costs. The net
non-recurring income of $3 million ($2 million after-tax, or $0.06 per diluted
share) is included in other income in the 2002 Consolidated Statement of Income.
Prior to the dissolution, CPMCP was owned equally by the Company and MCP
through membership interests that provided each company with a 50 percent voting
interest in CPMCP. Additionally, CPMCP's Board of Directors was composed of an
equal number of representatives from both members. The Company accounted for its
interest in CPMCP as a non-consolidated affiliate using the equity method of
accounting.
Both the Company and MCP owned and operated their respective production
facilities and sold all U.S. production of certain designated sweeteners to
CPMCP for exclusive distribution in the United States. Additionally, any
designated sweetener production from the Company's operations in Canada and
Mexico that was sold in the U.S. was distributed through CPMCP. Sales to CPMCP
were made at predetermined market-related prices.
Sales to CPMCP were recognized at the time title to the goods and all risks
of ownership transferred to CPMCP. The Company eliminated 100 percent of the
profit associated with sales to CPMCP until the risk of ownership and title to
the product passed from CPMCP to its customers.
The Company recorded its share of CPMCP's net earnings as earnings from a
non-consolidated affiliate. The amount recorded represented the Company's
allocated share of the net earnings of CPMCP, based upon the percentage of
designated product volumes supplied to CPMCP by the Company as compared to the
total designated product volumes supplied to CPMCP by the Company and the
venture partner, MCP.
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Company's transactions with CPMCP for
the periods indicated:
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS)
Sales to CPMCP.............................................. $417 $416
Purchases from CPMCP........................................ 30 23
Commission expense to CPMCP................................. 1 2
Fees and charges from CPMCP................................. 14 14
Receivables due from CPMCP at December 31................... 30 36
Payables due to CPMCP at December 31........................ 2 3
</Table>
The Company believes the receivables due from CPMCP are fully recoverable.
Summarized financial information for CPMCP is shown below:
<Table>
<Caption>
AT DECEMBER 31,
---------------
2002 2001
----- -----
(IN MILLIONS)
Current assets.............................................. $68 $100
Non-current assets.......................................... -- 3
--- ----
Total assets................................................ $68 $103
=== ====
Current liabilities......................................... $53 $ 74
Total equity................................................ 15 29
--- ----
Total liabilities and equity................................ $68 $103
=== ====
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
-------------
2002 2001
----- -----
(IN MILLIONS)
Net sales................................................... $849 $782
Gross profit................................................ 22 38
Net income.................................................. $ 12 $ 27
==== ====
</Table>
NOTE 6 -- SPECIAL CHARGES
One of the Company's continuing business strategies is to improve North
American profitability. In order to remain competitive while improving margins,
the Company implemented a restructuring plan in 2002 that included the
termination of approximately 200 employees throughout the three North American
countries in which it operates and the cancellation of certain lease
obligations. In connection with this restructuring plan, the Company recorded
charges of $4.3 million during the first quarter of 2002. Of this amount,
approximately $3.5 million represented employee severance costs and related
benefits and the balance represented provisions relating to the lease
obligations. The charge of $4.3 million was classified in general and
administrative expenses. As of December 31, 2002, all of the employee
terminations under the restructuring plan were completed and the restructuring
accrual was fully utilized.
In 2000, the Company recorded a $20 million charge pertaining to a
workforce reduction program and the write-off of nonproductive assets. The
charges consisted of $17.5 million for severance, pension and other post-
employment benefit costs associated with the workforce reduction and $2.5
million related to the write-off of certain capital projects. The workforce
reduction program affected approximately 266 employees, 109 of whom were located
in the United States. The workforce reduction principally affected employees in
U.S. sales and business development, as well as employees in North America and
South America manufacturing
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations, and included the integration of the Southern Cone sales and
administrative functions following the IMASA acquisition. As of December 31,
2000, all 266 of the employees affected by the workforce reduction program had
terminated employment with the Company and the Company had utilized the entire
$20 million accrual.
NOTE 7 -- FINANCIAL INSTRUMENTS, DERIVATIVES AND HEDGING ACTIVITIES
Fair value of financial instruments:
The carrying values of cash equivalents, accounts receivable, accounts
payable and short-term borrowings approximate fair values. The fair value of the
Company's long-term debt is estimated by discounting the future cash flows of
each instrument at rates currently available to the Company for similar debt
instruments of comparable maturities. Based on market quotes of the yields at
which the Company could issue debt with similar terms and remaining maturities,
the fair value of long-term debt, including the current portion of long-term
debt, at December 31, 2002 and 2001, was $552 million and $594 million,
respectively.
Derivatives:
The Company uses derivative financial instruments primarily to manage the
exposure to price risk related to corn and natural gas purchases used in the
manufacturing process and to manage its exposure to changes in interest rates on
outstanding debt instruments. The Company generally does not enter into
derivative instruments for any purpose other than hedging the cash flows
associated with specific volumes of commodities that will be purchased and
processed in a future month, and hedging the exposure related to changes in the
fair value of outstanding fixed-rate debt instruments. The Company occasionally
hedges commercial transactions and certain liabilities that are denominated in a
currency other than the currency of the operating unit entering into the
underlying transaction. The Company does not speculate using derivative
instruments.
The derivative financial instruments that the Company uses in its
management of commodity-price risk consist of open futures contracts and options
traded through regulated commodity exchanges. The derivative financial
instruments that the Company uses in its management of interest rate risk
consist of interest rate swap agreements. By using derivative financial
instruments to hedge exposures to changes in commodity prices and interest
rates, the Company exposes itself to credit risk and market risk. Credit risk is
the risk that the counterparty will fail to perform under the terms of the
derivative contract. When the fair value of a derivative contract is positive,
the counterparty owes the Company, which creates credit risk for the Company.
When the fair value of a derivative contract is negative, the Company owes the
counterparty and, therefore, it does not possess credit risk. The Company
minimizes the credit risk in derivative instruments by entering into
transactions only with investment grade counterparties. Market risk is the
adverse effect on the value of a financial instrument that results from a change
in commodity prices or interest rates. The market risk associated with
commodity-price and interest rate contracts is managed by establishing and
monitoring parameters that limit the types and degree of market risk that may be
undertaken.
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 market values
of corn inventory to differ from its cost and the actual purchase price of corn
and natural gas to differ from anticipated prices.
The Company periodically enters into futures and option contracts for a
portion of its anticipated corn and natural gas usage over the next twelve
months, in order to hedge the price risk associated with fluctuations in market
prices. The contracts limit the unfavorable effect that price increases will
have on corn and natural gas purchases. All of the Company's futures and option
contracts have been designated as cash flow hedges.
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unrealized gains and losses associated with marking the corn and natural
gas futures and option contracts to market are recorded as a component of other
comprehensive income (loss) and included in the stockholders' equity section of
the Consolidated Balance Sheets as part of accumulated other comprehensive
income (loss). These amounts are subsequently reclassified into earnings in the
month in which the related corn or natural gas is used or in the month a hedge
is determined to be ineffective.
The Company assesses the effectiveness of a hedge with a corn or natural
gas futures or option contract based on changes in the contract's intrinsic
value. The changes in the market value of such contracts has historically been,
and is expected to continue to be, highly effective at offsetting changes in the
price of the hedged item. The amounts representing the ineffectiveness of these
cash flow hedges are not significant.
The Company assesses its exposure to variability in interest rates by
continually 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 the fair value of
the Company's outstanding and forecasted debt instruments.
The Company uses a combination of fixed and variable rate debt to finance
its operations. The debt obligations with fixed cash flows expose the Company to
variability in the fair value of outstanding debt instruments due to changes in
interest rates. The Company has entered into interest rate swap agreements that
effectively convert the interest rate on certain fixed-rate debt to a variable
rate. These swaps call for the Company to receive interest at a fixed rate and
to pay interest at a variable rate, thereby creating the equivalent of
variable-rate debt.
The Company has designated the interest rate swap agreements as hedges of
the changes in fair value of the fixed-rate debt obligation attributable to
changes in interest rates. Changes in the fair value of interest rate swaps
designated as hedging instruments that effectively offset the variability in the
fair value of outstanding fixed-rate, long-term debt obligations are reported in
earnings. These amounts offset the gain or loss (that is, the change in fair
value) of the hedged fixed-rate debt instrument that is attributable to changes
in interest rates (that is, the hedged risk) which is reflected as an adjustment
to the carrying amount of the fixed-rate debt obligation and also recognized
currently in earnings. The net gain or loss recognized in earnings during 2002
representing the amount of the hedges' ineffectiveness and the component of the
derivative instruments' gain or loss excluded from the assessment of hedge
effectiveness was not significant.
At December 31, 2002, the Company's accumulated other comprehensive income
(loss) account included $10 million of unrealized losses, net of a $4 million
tax benefit, related to derivative instruments that hedge the anticipated cash
flows from future transactions, which are expected to be recognized in earnings
within the next twelve months. Transactions and events expected to occur over
the next twelve months that will necessitate reclassifying these derivatives
losses to earnings include the sale of finished goods inventory that includes
previously hedged purchases of raw corn. There were no cash flow hedges
discontinued during the year.
NOTE 8 -- FINANCING ARRANGEMENTS
The Company had total debt outstanding of $600 million and $756 million at
December 31, 2002 and 2001, respectively. Short-term borrowings at December 31,
2002 consist primarily of amounts outstanding under various unsecured local
country operating lines of credit.
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Short-term borrowings consist of the following at December 31:
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS)
Borrowings in various currencies (at rates of
2.5% -- 26.5%)............................................ $72 $154
Current portion of long-term debt........................... 12 290
--- ----
Total short-term borrowings............................... $84 $444
=== ====
</Table>
On October 15, 2002, the Company entered into a new three-year $125 million
revolving credit agreement (the "Revolving Credit Agreement"). The Revolving
Credit Agreement replaced the Company's previously existing $340 million
revolving credit agreement, which has been terminated. In 1999, the Company
filed a shelf registration with the Securities and Exchange Commission for
borrowings of up to $600 million and issued $200 million of 8.45 percent senior
notes thereunder. In 2002, the Company issued a total of $255 million of
five-year 8.25 percent senior notes under the shelf registration. The Company
can issue an additional $145 million of debt under the shelf registration.
Long-term debt consists of the following at December 31:
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS)
U.S. revolving credit facility borrowings, due 2005
(interest at 2.33% in 2001)............................... $ -- $277
8.45% senior notes, due 2009................................ 198 200
8.25% senior notes, due 2007................................ 253 --
Korean term loans, due 2003 -- 2004, (at rates of
5.5% -- 9.1%)............................................. 51 62
Canadian term loans, due 2005 (at rates of 4.3% -- 4.4%).... 25 57
Others, due in varying amounts through 2008, fixed and
floating interest rates ranging from 5.9% -- 7.4%......... 1 6
---- ----
Total..................................................... $528 $602
---- ----
Less current maturities..................................... 12 290
---- ----
Long-term debt............................................ $516 $312
==== ====
</Table>
Maturities of long-term debt are $12 million in 2003, $46 million in 2004,
$19 million in 2005, nil in 2006, $255 million in 2007 and $200 million
thereafter.
On March 14, 2002, the Company entered into interest rate swap agreements
to take advantage of the current interest rate environment by effectively
converting the interest rate associated with the Company's 8.45 percent $200
million senior notes due 2009 to a variable rate. These agreements involve the
exchange of fixed rate payments (at 8.45 percent) for variable rate payments on
$200 million of notional principal without the exchange of the underlying face
amount. Under the terms of the agreements, the Company receives fixed rate
payments and makes variable rate payments based on the six-month U.S. dollar
LIBOR rate plus a spread. The fair value of these interest rate swap agreements
at December 31, 2002 ($27 million) is reflected in the Consolidated Balance
Sheet as an offset to the increase in the fair value of the hedged debt
obligation. Interest rate differentials to be paid or received under these
agreements are recognized as adjustments to interest expense using the accrual
method. The Company does not hold or issue interest rate swap agreements for
trading purposes.
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- LEASES
The Company leases rail cars and certain machinery and equipment under
various operating leases. Rental expense under operating leases was $21.9
million, $21.1 million and $20.4 million in 2002, 2001 and 2000, respectively.
Minimum lease payments due on leases existing at December 31, 2002 are shown
below:
<Table>
<Caption>
YEAR MINIMUM LEASE PAYMENT
- ---- ---------------------
(IN MILLIONS)
2003........................................................ $16.5
2004........................................................ 11.7
2005........................................................ 9.7
2006........................................................ 8.2
2007........................................................ 7.9
Balance thereafter.......................................... 19.4
</Table>
NOTE 10 -- INCOME TAXES
The components of income before income taxes and the provision for income
taxes are shown below:
<Table>
<Caption>
2002 2001 2000
---- ---- ----
(IN MILLIONS)
Income (loss) before income taxes:
United States............................................. $ 22 $ (9) $(10)
Outside the United States................................. 95 111 112
---- ---- ----
Total.................................................. $117 $102 $102
---- ---- ----
Provision for income taxes:
Current tax expense
U.S. federal.............................................. $ 10 $ 2 $ 1
State and local........................................... 4 2 1
Foreign................................................... 34 30 19
---- ---- ----
Total current.......................................... $ 48 $ 34 $ 21
---- ---- ----
Deferred tax expense (benefit)
U.S. federal.............................................. $ (8) $ (6) $ (4)
State and local........................................... (1) (1) (1)
Foreign................................................... 3 9 20
---- ---- ----
Total deferred......................................... $ (6) $ 2 $ 15
---- ---- ----
Total provision............................................. $ 42 $ 36 $ 36
==== ==== ====
</Table>
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes are provided for the tax effects of temporary
differences between the financial reporting basis and tax basis of assets and
liabilities. Significant temporary differences at December 31, 2002 and 2001,
are attributable to:
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS)
Deferred tax liabilities attributable to:
Plants and properties.................................. $163 $186
Other.................................................. -- 13
---- ----
Total gross deferred tax liabilities...................... 163 199
---- ----
Deferred tax assets attributable to:
Employee benefit reserves.............................. 12 14
Pensions............................................... 4 3
Hedging/derivative contracts........................... 6 11
Other.................................................. 19 13
---- ----
Total gross deferred tax assets........................... 41 41
---- ----
Valuation allowance....................................... (8) (8)
---- ----
Net deferred tax assets................................... 33 33
---- ----
Total net deferred tax liabilities.......................... $130 $166
==== ====
</Table>
The Company maintained a valuation allowance of $8 million at December 31,
2002 and 2001, as it is management's belief that it is more likely than not that
certain foreign net operating loss carry forwards and tax credits will not be
fully utilized to offset taxable income before they expire.
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate follows:
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Provision for tax at U.S. statutory rate.................... 35.0% 35.0% 35.0%
Taxes related to foreign income............................. 0.3 (0.1) (2.2)
State and local taxes -- net................................ 1.5 0.4 1.8
Nondeductible goodwill...................................... -- 1.0 1.1
Tax credits................................................. (1.3) (1.0) --
Other items -- net.......................................... 0.5 (0.3) (0.7)
---- ---- ----
Provision at effective tax rate............................. 36.0% 35.0% 35.0%
==== ==== ====
</Table>
Provisions are made for estimated U.S. and foreign income taxes, less
credits that may be available, on distributions from foreign subsidiaries to the
extent dividends are anticipated. No provision has been made for income taxes on
approximately $420 million of undistributed earnings of foreign subsidiaries at
December 31, 2002, as such amounts are considered permanently reinvested.
NOTE 11 -- BENEFIT PLANS
The Company and its subsidiaries sponsor noncontributory defined benefit
pension plans covering substantially all employees in the United States and
Canada, and certain employees in other foreign countries. Plans for most
salaried employees provide pay-related benefits based on years of service. Plans
for hourly employees generally provide benefits based on flat dollar amounts and
years of service. The Company's general funding policy is to make contributions
to the plans in amounts that are within the limits of deductibility under
current tax regulations. Certain foreign countries allow income tax deductions
without regard to contribution
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
levels, and the Company's policy in those countries is to make the contribution
required by the terms of the applicable plan. Domestic plan assets consist
primarily of common stock, corporate debt securities and short-term investment
funds.
Domestic salaried employees are covered by a defined benefit "cash balance"
pension plan, which provides benefits based on service and Company credits to
the participating employees' accounts of between 3 percent and 10 percent of
base salary, bonus and overtime.
The Company also provides healthcare and life insurance benefits for
retired employees in the United States and Canada. U.S. salaried employees are
provided with access to postretirement medical insurance through Retirement
Health Care Spending Accounts. U.S. salaried employees accrue an account during
employment, which can be used after employment to purchase postretirement
medical insurance from the Company and Medigap or Medicare HMO policies after
age 65. The accounts are credited with a flat dollar amount and indexed for
inflation annually during employment. The accounts also accrue interest credits
using a rate equal to a specified amount above the yield on five-year Treasury
notes. Employees can use the amounts accumulated in these accounts, including
credited interest, to purchase postretirement medical insurance. Employees
become eligible for benefits when they meet minimum age and service
requirements. The Company recognizes the cost of these postretirement benefits
by accruing a flat dollar amount on an annual basis for each domestic salaried
employee. The Company has the right to modify or terminate these benefits.
Healthcare benefits for retirees outside the United States and Canada are
generally covered through local government plans.
Pension plans -- Net pension cost (income) consisted of the following for
the years ended December 31, 2002, 2001 and 2000:
<Table>
<Caption>
U.S. PLANS NON-U.S. PLANS
------------------ ------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
(IN MILLIONS)
Service cost................................... $ 2 $ 2 $ 2 $ 1 $ 2 $ 1
Interest cost.................................. 3 4 4 4 3 3
Expected return on plan assets................. (3) (5) (6) (4) (4) (4)
Credit due to salaried voluntary severance
program...................................... -- -- (2) -- -- --
--- --- --- --- --- ---
Net pension cost............................... $ 2 $ 1 $(2) $ 1 $ 1 $--
=== === === === === ===
</Table>
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The changes in benefit obligations and plan assets during 2002 and 2001, as
well as the funded status and the amounts recognized in the Company's
consolidated balance sheets related to the Company's pension plans at December
31, 2002 and 2001, were as follows:
<Table>
<Caption>
NON-U.S.
U.S. PLANS PLANS
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
(IN MILLIONS)
Benefit obligation
At January 1............................................ $ 53 $ 52 $55 $55
Service cost............................................ 2 2 1 2
Interest cost........................................... 3 4 4 3
Benefits paid........................................... (5) (1) (2) (2)
Actuarial (gain) loss................................... (3) 4 1 --
Settlements............................................. -- (9) -- --
Amendments.............................................. -- 1 -- --
Foreign currency translation............................ -- -- 1 (3)
---- ---- --- ---
Benefit obligation at December 31......................... $ 50 $ 53 $60 $55
==== ==== === ===
Fair value of plan assets
At January 1............................................ $ 42 $ 55 $52 $56
Actual return on plan assets............................ (2) (4) (1) 1
Employer contributions.................................. -- 1 2 1
Benefits paid........................................... (5) (10) (2) (3)
Foreign currency translation............................ -- -- 1 (3)
---- ---- --- ---
Fair value of plan assets at December 31.................. $ 35 $ 42 $52 $52
==== ==== === ===
Funded status............................................. $(15) $(11) $(8) $(3)
Unrecognized net actuarial loss (gain).................. -- (3) 13 7
Unrecognized prior service cost......................... 3 4 1 1
---- ---- --- ---
Net prepaid pension asset (liability)..................... $(12) $(10) $ 6 $ 5
==== ==== === ===
</Table>
The above information includes cost and funded status data related to the
Company's nonqualified pension plans. For these nonqualified plans, the
projected benefit obligation exceeded the fair value of plan assets by $6
million and $4 million as of December 31, 2002 and December 31, 2001,
respectively. Also, the accumulated benefit obligation exceeded the fair value
of these plan assets by $5 million as of December 31, 2002 and $4 million as of
December 31, 2001. For qualified plans in the U.S., the projected benefit
obligation and accumulated benefit obligation exceeded the fair value of plan
assets by $8 million and by $10 million, respectively, as of December 31, 2002.
As of December 31, 2001, the projected benefit obligation and accumulated
benefit obligation for these same plans exceeded the fair value of plan assets
by $7 million and $4 million, respectively. The Company recognized an additional
minimum liability of $4 million at December 31, 2002 related to an under-funded
plan. In connection with the recognition of this minimum liability, the Company
recorded an intangible asset of $3 million and a charge to other comprehensive
income of $1.0 million ($0.6 million, net of deferred income taxes of $0.4
million). The minimum pension liability will change from year to year as a
result of revisions to actuarial assumptions, experience gains or losses and
settlement rate changes.
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following weighted average assumptions were used to determine the
Company's obligations under the pension plans:
<Table>
<Caption>
U.S. PLANS NON-U.S. PLANS
------------------- ------------------
2002 2001 2000 2002 2001 2000
----- ---- ---- ---- ---- ----
Discount rate............................. 6.75% 7.5% 8.0% 6.5% 6.5% 6.5%
Rate of compensation increase............. 3.75% 4.5% 5.0% 4.5% 4.5% 4.5%
Expected return on plan assets............ 8.25% 9.0% 9.5% 8.5% 8.5% 8.5%
===== ==== ==== ==== ==== ====
</Table>
The Company and certain of its subsidiaries also maintain defined
contribution plans. The Company makes matching contributions to these plans
based on a percentage of employee contributions. Amounts charged to expense for
defined contribution plans totaled $4.3 million, $5.5 million and $5.6 million
in 2002, 2001 and 2000, respectively.
Postretirement benefit plans -- Net postretirement benefit costs consisted
of the following for the years ended December 31, 2002, 2001 and 2000:
<Table>
<Caption>
2002 2001 2000
---- ---- ----
(IN MILLIONS)
Service cost................................................ $1 $1 $1
Interest cost............................................... 2 2 1
Curtailment gain on divestiture of Enzyme Bio-Systems....... (1) -- --
Charge related to voluntary separation program.............. -- -- 2
-- -- --
Net postretirement benefit costs............................ $2 $3 $4
== == ==
</Table>
The Company's postretirement benefit plans currently are not funded. The
changes in the benefit obligations of the plans during 2002 and 2001, and the
amounts recognized in the Company's consolidated balance sheets at December 31,
2002 and 2001, were as follows:
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS)
Accumulated postretirement benefit obligation
At January 1.............................................. $29 $26
Service cost.............................................. 1 1
Interest cost............................................. 2 2
Actuarial (gain) loss..................................... 1 (1)
Benefits paid............................................. (1) --
Amendments................................................ -- 1
Curtailments.............................................. (1) --
--- ---
Benefit obligation at December 31......................... $31 $29
Unrecognized net actuarial (loss) gain.................... (3) 2
Unrecognized prior service cost........................... 1 (2)
--- ---
Accrued postretirement benefit costs........................ $29 $29
=== ===
</Table>
In measuring the postretirement benefit obligation, the Company assumed an
increase in the per capita cost of healthcare benefits of 10 percent for 2002
and 9 percent for 2001, declining to 5 percent by the year 2012 and remaining at
that level thereafter. An increase in the assumed healthcare cost trend rate by
1 percentage point would increase the accumulated postretirement benefit
obligation at December 31, 2002 by $3 million, while a decrease in the rate of 1
percentage point would decrease the obligation by $3 million, with a
corresponding effect on the service and interest cost components of the net
periodic postretirement benefit
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cost for the year then ended of $0.4 million. The accumulated postretirement
benefit obligation for U.S. plans was determined using an assumed discount rate
of 6.75 percent and 7.5 percent at December 31, 2002 and 2001, respectively. The
accumulated postretirement benefit obligation at December 31, 2002 and 2001, for
Canadian plans was determined using an assumed discount rate of 6.5 percent.
NOTE 12 -- SUPPLEMENTARY INFORMATION
Balance Sheet -- Supplementary information is set forth below:
<Table>
<Caption>
AT DECEMBER 31,
----------------
2002 2001
------ ------
(IN MILLIONS)
Accounts receivable -- net:
Accounts receivable -- trade.............................. $193 $234
Accounts receivable -- other.............................. 59 52
Allowance for doubtful accounts........................... (8) (7)
---- ----
Total accounts receivable -- net.......................... $244 $279
==== ====
Inventories:
Finished and in process................................... $ 89 $ 91
Raw materials............................................. 76 75
Manufacturing supplies.................................... 29 35
---- ----
Total inventories......................................... $194 $201
==== ====
Accrued liabilities:
Compensation expenses..................................... $ 19 $ 11
Dividends payable......................................... 4 4
Accrued interest.......................................... 18 8
Accrued income taxes...................................... 15 14
Taxes payable other than income taxes..................... 20 14
Other..................................................... 23 37
---- ----
Total accrued liabilities................................. $ 99 $ 88
==== ====
Non-current liabilities:
Employees' pension, indemnity, retirement, and other...... $ 67 $ 48
Other non-current liabilities............................. 1 2
---- ----
Total non-current liabilities............................. $ 68 $ 50
==== ====
</Table>
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Statement -- Supplementary information is set forth below:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
2002 2001 2000
---- ---- ----
(IN MILLIONS)
Earnings from non-consolidated affiliates and other income:
Earnings from non-consolidated affiliates................. $ 7 $14 $ 3
Gain from sale of EBS..................................... 8 -- --
Gain from dissolution of CPMCP............................ 3 -- --
Gain from cancellation of long-term obligation............ -- 3 --
Other..................................................... 2 4 6
--- --- ---
Total earnings from non-consolidated affiliates and other
income................................................. $20 $21 $ 9
=== === ===
Financing costs:
Interest expense.......................................... $39 $59 $59
Interest income........................................... (2) (3) (4)
Foreign currency transaction losses (gains)............... (1) 8 (1)
--- --- ---
Financing costs -- net.................................... $36 $64 $54
=== === ===
</Table>
Statements of Cash Flow -- Supplementary information is set forth below:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
2002 2001 2000
---- ---- ----
(IN MILLIONS)
Interest paid............................................... $29 $62 $70
Income taxes paid........................................... 47 30 34
</Table>
NOTE 13 -- STOCKHOLDERS' EQUITY
Preferred stock and stockholders' rights plan:
The Company has authorized 25 million shares of $0.01 par value preferred
stock, of which 1 million shares were designated as Series A Junior
Participating Preferred Stock for the stockholders' rights plan. Under this
plan, each share of the Company's common stock carries with it the right to
purchase one one-hundredth of a share of preferred stock. The rights will at no
time have voting power or pay dividends. The rights will become exercisable if a
person or group acquires or announces a tender offer that would result in the
acquisition of 15 percent or more of the Company's common stock. When
exercisable, each full right entitles a holder to buy one one-hundredth of a
share of Series A Junior Participating Preferred Stock at a price of $120. If
the Company is involved in a merger or other business combination with a
stockholder holding at least 15 percent of the Company's outstanding voting
securities, each full right will entitle a holder to buy a number of the
acquiring company's shares having a value of twice the exercise price of the
right. Alternatively, if a 15 percent stockholder engages in certain
self-dealing transactions or acquires the Company in such a manner that Corn
Products International, Inc. and its common stock survive, or if any person
acquires 15 percent or more of the Company's common stock, except pursuant to an
offer for all shares at a fair price, each full right not owned by a stockholder
holding at least 15 percent of the Company's outstanding voting securities may
be exercised for Corn Products International, Inc. common stock (or, in certain
circumstances, other consideration) having a market value of twice the exercise
price of the right. The Company may redeem the rights for one cent each at any
time before an acquisition of 15 percent or more of its voting securities.
Unless redeemed earlier, the rights will expire on December 31, 2007.
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Treasury Stock:
During 2002, the Company issued, from treasury, 70,000 restricted common
shares and 176,812 common shares upon the exercise of stock options under the
stock incentive plan. During 2001, the Company issued, from treasury, 19,930
restricted common shares and 141,310 common shares upon the exercise of stock
options under the stock incentive plan. Also, in connection with the Arancia
acquisition, the Company issued from treasury 70,000 common shares and 78,794
common shares in 2002 and 2000, respectively.
The Company retired 19,126, 22,905 and 18,335 shares of its common stock to
treasury during 2002, 2001 and 2000, respectively, by both repurchasing shares
from employees under the stock incentive plan and through the cancellation of
forfeited restricted stock. The Company repurchased shares from employees at
average purchase prices of $29.75, $27.92 and $23.10, or fair value at the date
of purchase, during 2002, 2001 and 2000, respectively. Additionally, in 2000 the
Company purchased, on the open market, 1,865,400 shares of its common stock at
an average purchase price of $23.91 per share. All of the acquired shares are
held as common stock in treasury, less shares issued to employees under the
stock incentive plan.
On January 21, 2000, the Company's Board of Directors authorized an
increase in the stock repurchase program from the previously authorized 2
million shares to 6 million shares of common stock over a five-year period. At
both December 31, 2002 and 2001, 2,549,650 shares had been repurchased under
this program at a total cost of approximately $64 million.
Set forth below is a reconciliation of common stock share activity for the
years ended December 31, 2000, 2001 and 2002.
<Table>
<Caption>
SHARES OF COMMON STOCK
---------------------------------------
ISSUED HELD IN TREASURY OUTSTANDING
------ ---------------- -----------
(IN THOUSANDS)
Balance at December 31, 1999...................... 37,660 703 36,957
Issuance in connection with acquisition......... -- (79) 79
Issuance of restricted stock as compensation.... -- (100) 100
Stock options exercised......................... -- (17) 17
Purchase/acquisition of treasury stock.......... -- 1,884 (1,884)
------ ----- ------
Balance at December 31, 2000...................... 37,660 2,391 35,269
Issuance of restricted stock as compensation.... -- (19) 19
Stock options exercised......................... -- (141) 141
Purchase/acquisition of treasury stock.......... -- 23 (23)
------ ----- ------
Balance at December 31, 2001...................... 37,660 2,254 35,406
Issuance in connection with acquisition......... -- (70) 70
Issuance of restricted stock as compensation.... -- (70) 70
Stock options exercised......................... -- (177) 177
Purchase/acquisition of treasury stock.......... -- 19 (19)
------ ----- ------
Balance at December 31, 2002...................... 37,660 1,956 35,704
====== ===== ======
</Table>
Stock Incentive Plan:
The Company has established a stock incentive plan for certain key
employees. In addition, following the spin-off from CPC, all existing CPC stock
options held by Company employees were converted to stock options to acquire
Corn Products International, Inc. common stock. These stock options retained
their original vesting schedules and expiration dates. The Company granted
additional nonqualified options to purchase 523,400, 546,300 and 805,500 shares
of the Company's common stock during 2002, 2001 and 2000, respectively. These
options are exercisable upon vesting, which occurs in 50 percent increments at
the one and
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
two-year anniversary dates of the date of grant. As of December 31, 2002,
certain of these nonqualified options have been forfeited due to the termination
of employees.
In addition to stock options, the Company awards shares of restricted stock
to certain key employees. The cost of these awards is being amortized to expense
over the applicable restriction periods.
The Company accounts for stock-based compensation using the intrinsic value
method. Pro forma disclosures of net income and earnings per share, assuming the
fair value method was used to account for stock options under SFAS 123, are
provided in Note 2 of these notes to the consolidated financial statements in
the section entitled "Stock-based compensation". For purposes of making the pro
forma disclosure, the estimated fair market value of stock option awards is
amortized to expense over the applicable vesting period. The fair value of the
stock option awards was estimated at the grant dates using the Black-Scholes
option pricing model with the following weighted average assumptions for 2002,
2001 and 2000, respectively: risk-free interest rates of 3.82 percent, 5.88
percent and 5.98 percent in 2002, 2001 and 2000; volatility factor of 1.54
percent, 1.42 percent and 8.28 percent in 2002, 2001 and 2000; and a weighted
average expected life of the awards of 6.92 years, 7.4 years and 7.84 years in
2002, 2001 and 2000. A dividend yield of 1.32 percent, 1.13 percent and 1.38
percent was assumed for 2002, 2001 and 2000, respectively.
The Black-Scholes model requires the input of highly subjective assumptions
and does not necessarily provide a reliable measure of fair value.
A summary of stock option and restricted stock transactions for the last
three years follows:
<Table>
<Caption>
WEIGHTED SHARES OF
STOCK OPTION STOCK OPTION AVERAGE RESTRICTED
SHARES PRICE RANGE EXERCISE PRICE STOCK
------------ ---------------- ---------------- ----------
(SHARES IN THOUSANDS)
Outstanding at January 1,
2000......................... 1,878 $13.06 to $32.31 $28.72 154
Granted...................... 806 22.75 to 27.41 25.39 93
Exercised/vested............. (17) 20.76 to 22.55 21.47 (46)
Cancelled.................... (114) 26.87 to 32.31 28.89 (7)
------------ ----------
Outstanding at December 31,
2000......................... 2,553 13.06 to 32.31 27.71 194
Granted...................... 546 27.78 to 32.31 28.71 26
Exercised/vested............. (141) 13.06 to 32.31 25.40 (31)
Cancelled.................... (54) 22.75 to 32.31 27.55 (19)
------------ ----------
Outstanding at December 31,
2001......................... 2,904 13.90 to 32.31 28.05 170
Granted...................... 523 28.65 to 33.13 28.80 70
Exercised/vested............. (177) 15.00 to 32.31 25.30 (16)
Cancelled.................... (100) 15.00 to 32.31 27.59 (6)
------------ ----------
Outstanding at December 31,
2002......................... 3,150 $13.90 to $33.13 $28.35 218
============ ==========
</Table>
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2002:
<Table>
<Caption>
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE
- ------------------------ ----------- -------- ------------ ----------- --------
(SHARES IN THOUSANDS)
$13.90 to 16.5650............... 60 $15.49 1.9 60 $15.49
16.5651 to 23.1910.............. 381 22.15 6.1 381 22.15
23.1911 to 26.5040.............. 107 24.03 4.1 107 24.03
26.5041 to 29.8170.............. 1,627 28.17 8.2 881 27.69
29.8171 to 33.1300.............. 975 32.33 5.1 957 32.31
----- ------ --- ----- ------
3,150 $28.35 6.7 2,386 $28.19
===== ====== === ===== ======
</Table>
The number of options exercisable at December 31, 2002 and 2001 was 2.4
million and 2.02 million, respectively. The weighted average fair value of
options granted during 2002, 2001, and 2000 was $4.17, $7.72 and $7.05,
respectively.
NOTE 14 -- SEGMENT INFORMATION
The Company operates in one business segment, corn refining, and is managed
on a geographic regional basis. Its North America operations include
corn-refining businesses in the United States, Canada and Mexico and, prior to
the December 2002 dissolution of CPMCP, its then non-consolidated equity
interest in that entity. This region also included EBS until it was sold in
February 2002. The Company's South America operations include corn-refining
businesses in Brazil, Argentina, Colombia, Chile, Ecuador and Uruguay. The
Company's Asia/Africa operations include corn-refining businesses in Korea,
Pakistan, Malaysia, Thailand and Kenya. Certain operating expenses that had
previously been reflected in North America operating income
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are now classified as corporate expenses. Prior years' information has been
reclassified to conform to the current year presentation.
<Table>
<Caption>
2002 2001 2000
------ ------ ------
(IN MILLIONS)
Net sales to unaffiliated customers (a):
North America............................................ $1,219 $1,212 $1,157
South America............................................ 401 440 460
Asia/Africa.............................................. 251 235 248
------ ------ ------
Total.................................................... $1,871 $1,887 $1,865
====== ====== ======
Operating income (b):
North America............................................ $ 56 $ 65 $ 77
South America............................................ 58 68 61
Asia/Africa.............................................. 54 45 54
Corporate................................................ (23) (17) (16)
Non-recurring earnings................................... 8 5 --
Special charges.......................................... -- -- (20)
------ ------ ------
Total.................................................... $ 153 $ 166 $ 156
====== ====== ======
Total assets (c):
North America............................................ $1,316 $1,430 $1,396
South America............................................ 360 489 647
Asia/Africa.............................................. 339 308 296
------ ------ ------
Total.................................................... $2,015 $2,227 $2,339
====== ====== ======
Depreciation and amortization:
North America............................................ $ 80 $ 87 $ 93
South America............................................ 17 28 29
Asia/Africa.............................................. 6 12 13
------ ------ ------
Total.................................................... $ 103 $ 127 $ 135
====== ====== ======
Capital expenditures:
North America............................................ $ 41 $ 52 $ 104
South America............................................ 16 28 28
Asia/Africa.............................................. 21 14 11
------ ------ ------
Total.................................................... $ 78 $ 94 $ 143
====== ====== ======
</Table>
- ---------------
Notes:
(a) Sales between segments for each of the periods presented are insignificant
and therefore are not presented.
(b) Includes earnings from non-consolidated affiliates accounted for under the
equity method as follows: North America -- $6 million and $13 million in
2002 and 2001, respectively; South America -- $1 million in each of 2002,
2001 and 2000.
(c) Includes investments in non-consolidated affiliates accounted for under the
equity method as follows: North America -- $13 million at December 31, 2001;
South America -- $3 million at December 31, 2002, $4 million at December 31,
2001 and $3 million at December 31, 2000.
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents net sales to unaffiliated customers by country
of origin for the last three years:
<Table>
<Caption>
NET SALES
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
United States.............................................. $ 605 $ 599 $ 629
Mexico..................................................... 332 390 359
Canada..................................................... 281 224 169
Brazil..................................................... 195 200 256
Korea...................................................... 162 155 172
Argentina.................................................. 63 100 95
Others..................................................... 233 219 185
------ ------ ------
Total...................................................... $1,871 $1,887 $1,865
====== ====== ======
</Table>
The following table presents long-lived assets by country at December 31:
<Table>
<Caption>
LONG-LIVED ASSETS
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
United States.............................................. $ 406 $ 434 $ 446
Mexico..................................................... 433 457 464
Canada..................................................... 147 151 163
Brazil..................................................... 88 131 145
Korea...................................................... 210 186 188
Argentina.................................................. 67 135 242
Others..................................................... 146 158 134
------ ------ ------
Total...................................................... $1,497 $1,652 $1,782
====== ====== ======
</Table>
67
SUPPLEMENTAL FINANCIAL INFORMATION
UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data is as follows:
<Table>
<Caption>
1ST QTR 2ND QTR 3RD QTR 4TH QTR
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2002
Net sales before shipping and handling costs........ $ 458 $ 515 $ 507 $ 499
Less: shipping and handling costs................... 26 29 27 26
----- ----- ----- -----
Net sales........................................... $ 432 $ 486 $ 480 $ 473
Gross profit........................................ 59 72 70 66
Net income.......................................... 11* 19 17 16**
Basic earnings per common share..................... $0.31* $0.52 $0.48 $0.46**
Diluted earnings per common share................... $0.31* $0.52 $0.48 $0.46**
</Table>
- ---------------
* Includes a $5 million ($3 million, net of tax, or $0.08 per diluted common
share) gain primarily related to the sale of EBS, net of restructuring
charges.
** Includes a $3 million ($2 million, net of tax, or $0.06 per diluted common
share) gain from the dissolution of CPMCP.
<Table>
<Caption>
1ST QTR 2ND QTR 3RD QTR 4TH QTR
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2001
Net sales before shipping and handling costs........ $ 499 $ 521 $ 506 $ 508
Less: shipping and handling costs................... 44 39 32 32
----- ----- ----- -----
Net sales........................................... $ 455 $ 482 $ 474 $ 476
Gross profit........................................ 75 73 84 67
Net income.......................................... 13 15 20* 9**
Basic earnings per common share..................... $0.36 $0.43 $0.55* $0.26**
Diluted earnings per common share................... $0.36 $0.43 $0.55* $0.26**
</Table>
- ---------------
* Includes net non-recurring income of $5 million ($3.5 million, net of tax, or
$0.10 per diluted common share) relating to a value-added tax refund, net of
certain one-time charges.
** Includes a $7 million ($4.6 million, net of tax, or $0.13 per common share)
foreign currency transaction loss, related to the January 6, 2002 devaluation
of the Argentine peso.
68
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's common stock is listed and traded on the New York Stock
Exchange. The following table sets forth, for the periods indicated, the high,
low and closing market prices of the common stock and common stock cash
dividends.
<Table>
<Caption>
1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- -------
2002
Market price range of common stock
High............................................... $34.04 $34.42 $31.23 $30.90
Low................................................ 26.64 29.69 23.68 27.11
Close.............................................. 31.87 30.90 28.65 30.13
Dividends declared per common share................ $ 0.10 $ 0.10 $ 0.10 $ 0.10
2001
Market price range of common stock
High............................................... $29.19 $32.00 $33.64 $37.00
Low................................................ 24.85 24.50 27.65 27.30
Close.............................................. 25.66 32.00 28.73 35.25
Dividends declared per common share................ $ 0.10 $ 0.10 $ 0.10 $ 0.10
</Table>
The number of shareholders of the Company's stock at December 31, 2002 was
approximately 11,600.
69
TEN-YEAR FINANCIAL HIGHLIGHTS*
<Table>
<Caption>
2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SUMMARY OF OPERATIONS
Net sales......................... $1,871 $1,887 $1,865 $1,735 $1,448 $1,418 $1,524 $1,387 $1,385 $1,243
Net income (loss) as previously
reported........................ 63 57 48 77 43 (75) 23 135 100 99
Adjustment for effect of a change
in accounting for inventories... -- -- -- (3) -- (1) 2 1 (2) 2
Net income (loss) as adjusted..... 63 57 48 74 43 (76) 25 136 98 101
Basic earnings (loss) per common
share:
Net income (loss) as previously
reported...................... $ 1.78 $ 1.60 $ 1.35 $ 2.06 $ 1.19 $(2.10) $ 0.64 $ 3.79 $ 2.81 $ 2.78
Adjustment for effect of a
change in accounting for
inventories................... -- -- -- (0.08) (0.01) (0.03) 0.06 0.03 (0.06) 0.06
Net income (loss) as adjusted... $ 1.78 $ 1.60 $ 1.35 $ 1.98 $ 1.18 $(2.13) $ 0.70 $ 3.82 $ 2.75 $ 2.84
Cash dividends declared per common
share........................... $ 0.40 $ 0.40 $ 0.40 $ 0.36 $ 0.16 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
BALANCE SHEET DATA
Working capital................... $ 138 $ (120) $ 69 $ 104 $ 46 $ (83) $ 151 $ 33 $ 113 $ 44
Property, plant and
equipment-net................... 1,154 1,293 1,407 1,349 1,298 1,057 1,057 920 830 792
Total assets...................... 2,015 2,227 2,339 2,217 1,956 1,676 1,676 1,315 1,214 1,121
Total debt........................ 600 756 720 544 404 350 350 363 294 209
Stockholders' equity.............. 828 857 960 1,030 1,059 992 1,033 606 555 491
Shares outstanding, year end...... 35.7 35.4 35.3 36.9 37.6 35.6 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
STATISTICAL DATA
Depreciation and amortization..... $ 103 $ 127 $ 135 $ 122 $ 95 $ 95 $ 88 $ 82 $ 80 $ 78
Capital expenditures.............. 78 94 143 162 91 100 192 188 145 122
Maintenance and repairs........... 72 82 78 84 67 69 61 65 65 57
Total employee costs.............. 187 194 195 192 131 142 170 164 149 177
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</Table>
- ---------------
* All periods prior to 2000 have been retroactively restated to reflect the
change in accounting for inventories effective January 1, 2000.
Note: 1997 and prior per share amounts are pro forma and have been
computed by dividing net income (loss) by the shares outstanding, which were
35.6 million at December 31, 1997, the spin-off and distribution date. For the
purpose of this calculation, the shares outstanding at December 31, 1997 were
assumed to be outstanding for all periods prior.
70