1
EXHIBIT 13.1
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW AND OUTLOOK
Corn Products International, Inc., became an independent and public Company as
of December 31,1997 after being spun off from CPC International Inc. (CPC), now
Bestfoods. This discussion and the comparative financial statements included in
this Annual Report were prepared by attributing the historical data for CPC's
Corn Refining Business to the Company. The results for the periods prior to
December 31,1997 were extracted from the consolidated results of CPC, of which
the Company was an integral part until spun off as a separate operation. This
may not necessarily be indicative of the result of operations or the financial
position that the Company would have obtained during the periods shown had it
been independent.
During our first year as an independent public company, Corn Products made
considerable progress in improving profitability by focusing all its operations
on pricing, volume, costs and efficiencies, and enhancing the quality of
products and customer services. Our primary goal is to return to a satisfactory
level of profitability. The Company's objective is to provide continuously
increasing returns to our shareholders. Our strategy is to drive for delivered
cost leadership in the markets we serve and maintain our market positions, in
particular, our product leadership positions globally in dextrose and regionally
in starch.
Our business grew solidly in 1998 as our North American business returned to
profitability, although still below the profit levels we saw only a few years
ago. The over-supply situation in the US sweeteners' marketplace which developed
in 1996 for High Fructose Corn Syrup (HFCS), lead to significant price declines
in 1997. The supply/demand balance improved in 1997 and continued to show
improvement in 1998, but is still below historical levels. Profitability has not
returned to the levels experienced in 1994 and 1995.
To date in 1999, the industry has been experiencing further improvement in
utilization rates and the Company has experienced better margins. We intend to
concentrate on restoring the United States to higher profitability, and plan to
make investments that we expect to strengthen our largest regional business.
This will include taking advantage of our positions throughout Canada, Mexico
and the United States to maximize our regional strength.
In December 1998, the Company completed a transaction to acquire the majority
control of Arancia-CPC, our joint venture in Mexico. Based on 1998 results, we
expect this acquisition to add approximately $350 million in annual net sales
and to place us solidly as the No. 3 producer in NAFTA.
In the Rest of the World, in 1998, the Company experienced continued volume
growth, although at a slower pace than experienced in prior years. In many
countries where we do business, the rate of economic progress of recent years
slowed as the financial market turmoil, which began in Asia, spread to South
America. The resulting reduced growth of some of our customers negatively
impacted our profits returns in 1998 as demand weakened and limited our ability
to adjust prices. In 1999, the Company anticipates improvement in some areas,
but sees difficulties in areas such as Brazil after the devaluation of its
currency in January of 1999. Our 70-year presence in South America has given us
experience in how to successfully manage through turbulent economic times. We
plan to further improve our solid South American business through timely growth
investments. Elsewhere, we plan to selectively enhance our other geographic
positions. At the start of 1999, we acquired the corn refining business of
Bang-IL in South Korea, which we expect, based on 1998 results, will add $65
million in annual net sales in 1999.
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RESULTS OF OPERATIONS
NET SALES. 1998 net sales grew 2 percent to $1,448 million from $1,418 million
in 1997, with 4 percent higher volume. 1998 pricing was lower in some areas than
in 1997, reflecting the passthrough of lower corn costs and lower exchange
rates. However, in North America, net sales grew by 5 percent, including one
month of additional sales from our Mexican operations, resulting from our
increased investment. Pricing in the U.S. business rebounded from a
disappointing 1997 with a 4 percent increase in net sales on 1 percent higher
volume. The down cycle in HFCS, which hit a pricing low in 1997, improved
somewhat in 1998, but still remains low versus historical levels. In Canada,
lower pricing and lower exchange rates offset volume gains resulting in a 9
percent reduction in net sales. In the Rest of the World, net sales declined 2
percent as lower exchange rates and prices more than offset volume gains of 7
percent.
1997 net sales were down 7 percent from $1,524 million in 1996. The 1997 net
sales decline came, despite 5 percent volume growth, as lower corn costs
combined with excess supply in the HFCS business resulting in significantly
lower prices. Excess supply was caused by significant new capacity coming on
stream and a lower than expected increase in demand from Mexico.
COST OF SALES AND OPERATING EXPENSES. Cost of sales for 1998 was marginally
lower than 1997, despite the 4 percent increase in volume. Lower cost of sales
resulted from lower corn costs and operating efficiencies. Consequently, 1998
gross profit margins improved to 12 percent of sales, from 10 percent in 1997
and 9 percent in 1996. The North American business showed a significant
turnaround in 1998; however, further improvement is still necessary to achieve
an acceptable level of return. The Rest of the World operations continue to
achieve good profit, although somewhat moderated, as the emerging markets work
through the effects of the financial market turmoil. Cost of sales in 1997 was 7
percent below 1996. The high costs of corn experienced in 1996 declined during
1997. In 1996, cost of sales included a $40 million write down for certain
liquidated corn futures positions, when corn prices fell sharply toward the end
of the year.
Operating expense increased 6 percent to $101 million in 1998 from $95 million
in 1997 and $88 million in 1996. The increase in 1998 operating expense was
largely due to corporate costs associated with being a stand-alone entity.
Excluding the increased corporate cost, 1998 operating expense declined 2
percent from the prior year.
Equity in earnings of unconsolidated affiliates improved in 1998, compared to
1997, primarily due to improved results in the Mexican joint venture.
RESTRUCTURING CHARGE. In 1997, the Company recorded a $94 million pre-tax ($71
million after tax) restructuring charge. The charge was primarily for severance
and severance related costs for more than 200 employees, principally in the
Company's international operations. The Company has used the majority of the
restructuring provision.
SPIN-OFF COSTS. In 1997, the Company also recorded a $15 million pre-tax ($12
million after tax) charge for costs related to the spin-off of the Corn Refining
Business from CPC.
OPERATING INCOME. Operating income for 1998 was $84 million, up from $48 million
in 1997, excluding special charges for spin-off and restructuring. In North
America, 1998 operating income improved $50 million from 1997 reflecting
improved margins in HFCS and glucose, and solid results in Mexico. In the Rest
of the World, operating income was down 7 percent to $76 million dollars from
the $82 million achieved in 1997.
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Excluding the restructuring charge and spin-off costs described above, 1997
operating income declined 26% from 1996 to $48 million, primarily attributable
to the unfavorable high fructose pricing situation in North America.
FINANCING COSTS. 1998 financing costs decreased approximately 50 percent to $13
million from $28 million in 1997, as the Company significantly reduced its
borrowings through most of the year. Lower borrowings resulted from better
operating performance and the consequent improved cash flow.
1997 financing costs were in-line with 1996 as debt allocated by CPC (the then
parent company) and interest rates both remained relatively stable.
PROVISION FOR INCOME TAXES. The Company's effective tax rate for 1998 was 35
percent. This represents the favorable effect of foreign source income in
countries where tax rates are generally lower than in the United States. In
1997, the Company reported a pre-tax loss arising from restructuring and
spin-off charges. The tax benefit rate attributed to these special items was 24
percent. The tax rate attributed to 1997 operating profits was 35 percent. This
resulted in a net effective rate of 21 percent for 1997. The effective rate in
1996 of 33.6 percent was an assumed rate for CPC.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. In 1997, the Company
recorded a $3 million after-tax charge because of a change in accounting
principal. The change in accounting principal resulted from a pronouncement by
the Emerging Issues Task Force (EITF) requiring companies to expense certain
previously capitalized reengineering costs.
NET INCOME. Net income for 1998 totaled $43 million compared to $11 million in
1997, excluding the after tax effect of special charges in 1997. The improvement
in net income largely reflects the improvement in the North American business,
as well as the lower financing costs. The 1997 net loss was $75 million,
including the special charges for restructuring, spin-off and the cumulative
effect of change in accounting principal. 1996 net income was $23 million,
reflecting adverse corn prices and the write-down of corn futures.
Earnings per share increased to $1.19 per fully diluted share, up from the $0.30
per share before the restructuring and spin-off costs and change in accounting
principle, or a loss of $2.10 after these charges.
LIQUIDITY & CAPITAL RESOURCES
Total assets increased to $1,946 million from $1,666 million at December 31,
1997. This increase was the result of the consolidation of the Mexican
operations resulting from the Arancia transaction, which added $400 million in
assets. Excluding this transaction, total assets declined $120 million,
reflecting the repayment of a $60 million loan made by the Company to
Arancia-CPC earlier in the year. The proceeds from the loan, along with cash,
were used to repay $114 million in revolving debt in the United States and
Canada. The effect of weaker currencies also reduced total assets.
In the past five years, the Company has invested over $700 million in capital
projects and modernized or expanded most of its plants in line with projected
market demand. The Company plans to continue investing to meet customer demand
and drive for delivered cost leadership.
NET CASH FLOWS. Cash flows in 1998 continued to fund the Company's working
capital, capital expenditure program and a modest dividend payment. Net cash
flows from 1998 operations were $90 million, down from $215 million in 1997. The
1997 cash flows included the results of the additional quarter in operations
outside of North America due to the change in the year-end reporting period.
1997 cash flows from operations was exceptionally high, despite the net loss for
the year, and resulted from reductions in trade working capital combined with
the adjustment for
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the restructuring charge and spin-off costs described above. In 1996, lower net
income, together with higher working capital, resulted in a negative cash flow
from operations.
Cash used for investing activities in 1998 was $60 million, compared to $133
million in 1997. This resulted from lower capital expenditures of $91 million,
compared to $116 million in 1997, the receipt of the repayment of the $60
million loan noted above and the initial payment on the Mexican transaction. In
1996, The Company expended $251 million for investing activities. This amount
included $191 million for net capital expenditures and the $60 million loan to
the Company's Mexican joint venture to fund capital projects, which was repaid
in 1998.
The Company has a $340 million 5-year revolving credit facility in the United
States due December 2002. Outstanding borrowings against the revolver at
December 31, 1998, were $152 million at a rate of 5.45 percent. Long-term debt
assumed in conjunction with the Arancia-CPC transaction amounts to $154 million.
The current portion of long term debt is $7 million. The Company also has a
number of short-term credit facilities in its foreign operations consisting of
operating lines of credit. The Company expects these credit facilities, together
with cash flow from operations, to provide sufficient operating funds for
capital expenditures in support of its business strategies.
RISK AND UNCERTAINTIES
The Company operates in one business segment and in 22 countries. In each
country, the business and assets are subject to varying degrees of risk and
uncertainty. The Company insures its business and assets in each country against
insurable risk in a manner that it deems appropriate. The Company believes 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 the Company's results. The Company also has policies to handle other
financial risks discussed below.
COMMODITY COSTS. The Company's finished products are made primarily from corn.
Purchased corn accounts for 40 percent to 65 percent of finished product costs.
In North America, the Company sells a large portion of finished product at firm
prices established in supply contracts lasting for periods of up to one year. In
order to minimize the effect of volatility in the cost of corn related to these
firm-priced supply contracts, the Company enters into corn futures contracts, or
takes hedging positions in the corn futures market. From time to time, the
Company may also enter into anticipatory hedges. These contracts typically
mature within one year. At expiration, the Company settles 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 the Company is hedging generally offset such fluctuations. While the
corn futures contracts or hedging position 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. In the Rest of the World,
sales of finished product under long-term firm-priced supply contracts are not
material.
Based on the Company's overall commodity hedge exposure at December 31, 1998, a
hypothetical 10% change in market rates applied to the fair value of the
instruments would have no material impact on the Company's earnings, cash flows,
financial position, or fair value of commodity price risk sensitive instruments
over a one-year period.
INTERNATIONAL OPERATIONS AND FOREIGN EXCHANGE. For more than 70 years, the
Company has operated a multinational business subject to the risks inherent in
operating in foreign countries and with foreign
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currencies. The Company's US Dollar denominated results are subject to foreign
exchange fluctuations, and its non-US operations are subject to political,
economic and other risks.
The Company primarily sells world commodities and; therefore, believes that
local prices will adjust relatively quickly to offset the effect of a local
devaluation. Corn Products generally does not enter into foreign currency
hedging transactions. The Company's policy is to hedge only commercial
transactions denominated in a currency other than the currency of the country in
which the operating unit responsible for the transaction is located.
INTEREST RATE EXPOSURE. Approximately 60 percent of the Company's borrowings are
short term credit facilities with floating interest rates. In the future, the
Company may convert a portion of the current debt into a longer term fixed rate
instrument. The remaining 40 percent of the Company's debt is long term with
variable interest rates primarily tied to LIBOR. Should short-term rates change,
this could affect our interest costs: current economic projections do not
indicate a significant change in the interest rate in the near furtue.
READINESS FOR THE YEAR 2000. The Year 2000 (Y2K) issue is the result of certain
computer programs using two digits rather than four to define the applicable
year. During 1997, the Company developed a plan (the Program) to address the
Year 2K issue and began converting its computer systems to be Y2K compliant. The
Company established a team with appropriate senior management support to
identify and correct Y2K issues. The Company expects to fix or replace internal
software where necessary. This includes software in all of the Company's
manufacturing plants, building facilities and business systems. If not
corrected, affected computer applications could fail or create erroneous
results.
The Program involves assessment, evaluation, testing and remediation. During
1998, the Company substantially completed the assessment phase of the Program
and prioritized these systems based on their criticality to business operations,
and began evaluation and remediation. Evaluation involves the analysis of
identified information technology (IT) and non-IT systems for Y2K compliance.
Remediation includes rewriting code in existing software, installation of new
software and replacement of non-compliant equipment. As of December 31, 1998,
considerable progress had been made in remediation. In addition, through the use
of third party consultants, the Company continues an ongoing process of
evaluating vendor statements and publicly available information about the Y2K
compliance of various systems in operation at its sites. The Company intends to
modify or replace systems, as appropriate, which appear non-compliant,
particularly those of high or medium priority.
Y2K compliance depends not only on our internal manufacturing and administrative
processes, but also on the ability of the different participants in the supply
chain to interchange products, services, and information without interruption.
The Company also is communicating with suppliers and service providers to
ascertain whether the equipment and services provided by them will be Y2K
compliant. Until the Company receives and analyzes responses from suppliers and
providers, the Company cannot assess the potential impact of third party
supplier and service provider Y2K issues.
The Company is exploring alternative solutions and developing contingency plans
for handling mission critical areas in the event that remediation is
unsuccessful. The Company anticipates that contingency plans may include the
stockpiling of necessary supplies, the build-up of inventory, creation of
computerized or manual back-up systems, replacement of vendors,
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and addition of new vendors. The Company expects to complete the Program,
including establishment of contingency plans, in August 1999.
The Company currently estimates the total costs of the Program to achieve Y2K
readiness at $10 to $14 million of expense. Planned capital expenditures
indirectly related to Y2K, could add an additional $5 to $7 million to the cost
of the Program. As of December 1998, the direct costs incurred by the Program to
remediate Y2K issues were $7 million and capital expenditures indirectly related
to Y2K were an additional $1.
Corn Products' Y2K plan is subject to a variety of risks and uncertainties. Some
of the risks and uncertainties are beyond the Company's control, such as the Y2K
preparedness of third party vendors and service providers and unidentified
issues with hardware, software and embedded systems. The Company can not assure
that it will successfully complete the Program on a timely basis, achieving Y2K
readiness prior to January 1, 2000, or a prior critical failure date. The
Company's failure to successfully complete the Y2K project could have a material
adverse impact on its ability to manufacture and/or deliver its products.
FORWARD LOOKING STATEMENTS
This annual report contains certain forward-looking statements concerning the
Company's financial position, business strategy, budgets, projected costs and
plans and objectives of management for future operations as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend," and other similar expressions. These statements contain
certain inherent risks and uncertainties. Although the Company believes its
expectations reflected in such forward-looking statements are based on
reasonable assumptions, stockholders are cautioned that no assurance can be
given that such expectations will prove correct and that actual results and
developments may differ materially from those conveyed in such forward-looking
statements. Important factors that could cause actual results to differ
materially from the expectations reflected in the forward-looking statements
herein include fluctuations in worldwide commodities markets and the associated
risks of hedging against such fluctuations; fluctuations in aggregate industry
supply and market demand; general economic, business and market conditions in
the various geographic regions and countries in which the Company manufactures
and sells its products, including fluctuations in the value of local currencies;
increased competitive and/or customer pressure in the corn refining industry;
and Year 2000 preparedness. Such forward-looking statements speak only as of the
date on which they are made and the Company does not undertake any obligation to
update any forward-looking statement to reflect events or circumstances after
the date of this Annual Report. If the Company does update or correct one or
more forward-looking statements, investors and others should not conclude that
the Company will make additional updates or corrections with respect thereto or
with respect to other forward-looking statements. For a further description of
risk factors, see the Company's Annual report on Form 10-K for the year ended
December 31, 1998.
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REPORT OF MANAGEMENT
THE MANAGEMENT OF CORN PRODUCTS is responsible for the financial and operating
information contained in this Annual Report, including the financial statements
covered by the independent auditors' report. The statements were prepared in
conformity with United States generally accepted accounting principles and
include, where necessary, informed estimates and judgements.
The results for the periods prior to January 1, 1998 were extracted from the
consolidated results of CPC International, Inc., of which the Company was an
integral part until it was spun off as a separate operation on December 31,
1997. Those results may not necessarily be indicative of the results of
operations or financial position that would have been obtained if the Company
had been a separate, independent company during the periods shown.
The Company maintains systems of accounting 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.
Elements of these control systems are the establishment and communication of
accounting and administrative policies and procedures, the selection and
training of qualified personnel, and continuous programs of internal audits.
The Company's financial statements are reviewed by its Audit Committee, which is
composed entirely of outside Directors. This Committee meets periodically with
the independent auditors and management to review the scope and results of the
annual audit, interim reviews, internal controls, internal auditing, and
financial reporting matters. The independent auditors have direct access to the
Audit Committee.
James W. Ripley
Chief Financial Officer
January 29, 1999
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REPORT OF INDEPENDENT AUDITORS
KPMG
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CORN PRODUCTS INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of Corn Products
International, Inc. and Subsidiaries as of December 31, 1998 and 1997, 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, 1998. 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 generally accepted auditing
standards. 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 Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the Consolidated Financial Statements, the Company
changed its method of accounting for business process reengineering costs in
1997.
KPMG LLP
Chicago, Illinois
January 29, 1999
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CORN PRODUCTS INTERNATIONAL, INC. - CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
------- ------- -------
1998 1997 1996
------- ------- -------
Net sales $ 1,448 $ 1,418 $ 1,524
Cost of sales 1,277 1,280 1,381
------- ------- -------
GROSS PROFIT 171 138 143
------- ------- -------
Selling, general and administrative costs 101 95 88
Restructuring and spin-off costs - net -- 109 --
Equity in (earnings) of unconsolidated affiliates (14) (5) (10)
------- ------- -------
87 199 78
------- ------- -------
OPERATING INCOME (LOSS) 84 (61) 65
Financing costs 13 28 28
------- ------- -------
Income (loss) before income taxes and minority interest 71 (89) 37
(Provision) benefit for income taxes (25) 19 (12)
Minority stockholder interest (3) (2) (2)
------- ------- -------
NET INCOME (LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLE 43 (72) 23
Cumulative effect of change in accounting principle net
of income tax benefits of $2 million -- 3 --
------- ------- -------
======= ======= =======
NET INCOME (LOSS) $ 43 $ (75) $ 23
======= ======= =======
Weighted average common shares outstanding:
Basic 36.0 35.6 35.6
Diluted 36.1 35.6 35.6
Earnings (loss) per common share*
Basic and diluted:
Net income before change in accounting principle $ 1.19 $ (2.02) $ 0.64
Cumulative effect of change in accounting principle -- $ (0.08) --
Net income (loss) per common share $ 1.19 $ (2.10) $ 0.64
See notes to the consolidated financial statements.
* 1997 and 1996 per share amounts are pro forma.
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CORN PRODUCTS INTERNATIONAL, INC. - CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1997
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 36 $ 85
Accounts receivable - net 224 182
Inventories 175 123
Prepaid expenses 6 13
Deferred tax asset 24 20
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 465 423
- ----------------------------------------------------------------------------------------------------------
Property, plant and equipment
Land 54 52
Buildings 668 496
Machinery and equipment 1,931 1,650
- ----------------------------------------------------------------------------------------------------------
Total property, plant and equipment, at cost 2,653 2,198
Less accumulated depreciation (1,355) (1,141)
- ----------------------------------------------------------------------------------------------------------
1,298 1,057
Investments in and loans to unconsolidated subsidiaries 28 168
Goodwill, net of accumulated amortization 129 --
Other assets 26 18
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,946 $ 1,666
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings and current portion of long term debt $ 250 $ 337
Accounts payable 96 90
Accrued liabilities 59 69
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 405 496
- ----------------------------------------------------------------------------------------------------------
Non-current liabilities 63 37
Long-term debt 154 13
Deferred taxes on income 180 128
Minority stockholders' interest 91 6
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 - 37,611,396 and 35,594,360 issued
and outstanding on December 31, 1998 and
December 31, 1997, respectively 1 1
Additional paid in capital 1,066 1,008
Less: Treasury stock (common stock; 51,374 shares in 1998) at cost (1) --
Deferred compensation - restricted stock (2) --
Accumulated comprehensive income (loss) (48) (23)
Retained earnings 37 --
- ----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,053 986
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 1,946 $ 1,666
==========================================================================================================
See notes to the consolidated financial statements.
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CORN PRODUCTS INTERNATIONAL, INC. -
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31
(IN MILLIONS)
---- ---- ----
1998 1997 1996
---- ---- ----
NET INCOME (LOSS) $ 43 $(75) $ 23
Other comprehensive income/loss
Currency translation adjustment (25) (11) (2)
---- ---- ----
COMPREHENSIVE INCOME (LOSS) $ 18 $(86) $ 21
==== ==== ====
See notes to the consolidated financial statements.
CORN PRODUCTS INTERNATIONAL, INC. -
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS) COMMON ADDITIONAL TREASURY DEFERRED ACCUMULATED RETAINED NET
STOCK PAID-IN STOCK COMPENSATION COMPREHENSIVE EARNINGS STOCKHOLDER
CAPITAL INCOME (LOSS) INVESTMENT
------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $0 $0 $0 $0 $(10) $0 $610
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 23
Transfer from CPC, net 404
Currency translation (2)
adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $0 $0 $0 $0 $(12) $0 $1,037
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (75)
Net income for the change in 10
reporting period
Transfer from CPC, net 1,008 (972)
Currency translation (11)
adjustment
Stock issued in connection 1
with spin-off
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $1 $1,008 $0 $0 $(23) $0 $0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 43
Dividends declared (6)
Issuance of common stock in
connection with 51
acquisition
Issuance of common stock 6
as compensation
Deferred compensation - (2)
restricted stock
Stock options exercised 1
Purchase of treasury stock (1)
Translation adjustment (25)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $1 $1,066 $(1) $(2) $(48) $37 $0
====================================================================================================================================
See notes to the consolidated financial statements.
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CORN PRODUCTS INTERNATIONAL, INC. - Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31
( in millions)
1998 1997 1996
------ ------ ------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
Net income (loss) $ 43 $ (75) $ 23
Net income for the change in reporting period -- 10 --
Non-cash charges (credits) to net income:
Depreciation and amortization 95 103 88
Restructuring and spin-off charges -- 109 --
Cumulative effect of change in accounting principle - net -- 3 --
Deferred taxes 10 10 (17)
Other - net -- 1 (23)
Equity in earnings of unconsolidated affiliates -- -- (1)
Changes in trade working capital:
Accounts receivable and prepaid items (5) 34 (95)
Inventories (32) 34 (50)
Income taxes 3 -- --
Other assets (5) -- --
Accounts payable and accrued liabilities (19) (14) (30)
- ---------------------------------------------------------------------------------------------------
Net cash flows from (used for) operating activities 90 215 (105)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Capital expenditures (91) (116) (192)
Proceeds from disposal of plants and properties 2 4 1
Payment for acquisition, net of cash of $15 million acquired (31) -- --
Investments in and loans to unconsolidated affiliates 60 (21) (60)
- ---------------------------------------------------------------------------------------------------
Net cash flows used for investing activities (60) (133) (251)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Payments on short term borrowings, net of proceeds (86) -- (12)
Payments on long term debt, net of proceeds (10) (23) (35)
Other non-current liabilities 21 -- --
Dividends paid (3) -- --
Cost of common stock repurchased (1) -- --
Increase (decrease) in transfer from CPC International, Inc., net -- (6) 404
- ---------------------------------------------------------------------------------------------------
Net cash flows from (used for) financing activities (79) (29) 357
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (49) 53 1
Cash and cash equivalents, beginning of period 85 32 31
===================================================================================================
Cash and cash equivalents, end of period $ 36 $ 85 $ 32
===================================================================================================
Supplemental cash flow information:
Interest paid $ 11 $ 19 $ 19
Income taxes paid $ 12 $ 10 $ 11
See notes to the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
On February 26, 1997, the Board of Directors of CPC International Inc.
approved the spin-off of CPC's corn refining and related business (the
"Corn Refining Business") to its stockholders. As a result of the spin-off
on December 31, 1997, CPC distributed 100 percent of the Company's common
stock (the "Corn Products Common Stock") through a special dividend to its
stockholders. The financial statements at December 31, 1997 reflect the
effects of the spin-off. The Company carries its assets and liabilities at
historical cost. The historical actions of CPC's Corn Refining Business,
including CPC'S accounting policies, are attributable to the Company. The
financial results for the years ended December 31, 1996 and 1997 included
in these financial statements are not necessarily indicative of the results
that would have occurred if the Company had been an independent public
company during that time.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its majority owned subsidiaries.
Intercompany accounts and transactions have been eliminated in
consolidation.
CHANGES IN REPORTING PERIOD - Prior to the 1998 financial year, the
accounts of subsidiaries outside of North America were based on fiscal
years ending September 30; however, as of December 31, 1997 the Company
changed the fiscal year end for its subsidiaries located outside North
America to that of its North American operation, which is the calendar
year. The results of the three-month stub period for 1997 were included as
an adjustment of shareholders' equity.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of foreign
subsidiaries other than those in highly inflationary economies are
translated at current exchange rates with the related translation
adjustments reported as a separate component of stockholders' equity.
Income statements accounts are translated at the average exchange rate
during the period. In highly inflationary economies 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.
CASH AND CASH EQUIVALENTS - Cash equivalents consist of all investments
purchased with an original maturity of three months or less, and which have
virtually no risk of loss in value.
INVENTORIES are stated at the lower of cost or market. In the United
States, corn is valued at cost on the last-in, first-out method. Had the
first-in, first-out method been used for US inventories, the carrying value
of these inventories would have increased by $7.8 million and $10.5 million
in 1998 and 1997, respectively. Outside the United States, inventories
generally are valued at average cost.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Depreciation is generally computed on the straight-line method over
the
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14
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
estimated useful lives of depreciable assets at rates ranging from 10 to 50
years for buildings and 5 to 20 years for all other assets. Where permitted
by law, accelerated depreciation methods are used for tax purposes.
Long-lived assets are reviewed for impairment whenever the facts and
circumstances indicate that the carrying amount may not be recoverable.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES are carried at cost or less,
adjusted to reflect the Company's proportionate share of income or loss
less dividends received.
GOODWILL - Goodwill represents the excess of cost over fair value of net
assets acquired and is being amortized over a period of 40 years using the
straight-line method. The carrying value of goodwill is reviewed if the
facts and circumstances suggest that it may be impaired. Negative operating
results, negative cash flows from operations, among other factors, could be
indicative of the impairment of goodwill. If this review indicates that
goodwill will not be recoverable, the Company's carrying value of the
goodwill would be reduced.
INCOME TAXES - Deferred income taxes reflect the difference between the
assets and liabilities recognized for financial reporting purposes and
amounts recognized for tax purposes. Deferred taxes are based on tax laws
as currently enacted. The Company makes provisions for estimated US and
foreign income taxes, less available tax credits and deductions, that may
be incurred on the remittance by the Company's subsidiaries of
undistributed earnings, except those deemed to be indefinitely reinvested.
COMMODITIES - The Company follows a policy of hedging its exposure to
commodity fluctuations with commodities futures contracts for its North
American corn purchases. All firm priced business is hedged, other business
may or may not be hedged at any given time based on management's decisions
as to the need to fix the cost of such raw materials to protect the
Company's profitability. Realized gains and losses arising from such
hedging transactions are considered an integral part of the cost of these
commodities and are included in the cost when purchased.
EARNING PER COMMON SHARE - Basic earnings per common share have been
computed by dividing net income (loss) by the weighted average shares
outstanding, 36.0 million at December 31, 1998, and 35.6 million at
December 31, 1997, the distribution date. For the purpose of this
calculation and the diluted earnings per share, the shares outstanding at
December 31, 1997, were assumed to be outstanding for all prior periods.
Diluted earnings per share has been computed by dividing net income (loss)
by the weighted average shares outstanding at December 31, 1998 and 1997,
including the dilutive effects of stock options outstanding for a total of
36.1 million and 35.6 million, respectively. 1997 and 1996 EPS have been
presented on a pro forma basis, assuming 35.6 million shares were
outstanding.
RISK AND UNCERTAINTIES - The Company operates in one business segment and
in more than 20 countries. In each country, the business is subject to
varying degrees of risk and uncertainty. It insures its business and assets
in each country against insurable risks in a manner that it deems
appropriate. Because of its diversity, the Company believes that the risk
of 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
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15
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Company believes 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 the Company's results.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles 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.
CHANGE IN ACCOUNTING PRINCIPLE - In November 1997 Emerging Issues Task
Force (EITF) issued No. 97-13 "Accounting for Business Process
Reengineering Costs," which requires that certain costs related to
reengineering business processes either done separately or in conjunction
with an information technology project be expensed rather than capitalized.
This requirement was effective in the fourth quarter of 1997 and required
that any unamortized balance of previously capitalized costs be expensed
and treated as a change in accounting principle. Accordingly, for the year
ended December 31, 1997, the Company recorded a cumulative effect of a
change in accounting principle of $5 million before taxes, $3 million after
taxes, or $0.08 per common share.
REPORTING COMPREHENSIVE INCOME - Comprehensive income is a more inclusive
financial reporting methodology, which includes disclosure of certain
financial information that has not historically been recognized in the
calculation of net income. Other comprehensive income refers to revenues,
expenses, gains and losses, which, under generally accepted accounting
principles, have previously been reported as separate components of equity
such as currency translation. The Company has adopted this reporting for
the current year.
SEGMENTAL INFORMATION - The Company is in one business segment - corn
refining - and produces a wide variety of products.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS
(SFAS 132) - SFAS 132 supercedes the disclosure requirements in SFAS 87,
Employers' Accounting for Pensions, and SFAS 106, Employers' Accounting for
Post-retirement Benefits Other Than Pensions. The overall objective of SFAS
132 is to improve and standardize disclosures about pensions and other
post-retirement benefits and to make the required information more
understandable. The Company has adopted SFAS 132 for the current year.
There was no effect on the results of operations or financial position.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the
Financial Accounting Standards Board ("FASB") issued SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities", which is required to be
adopted in years beginning after June 15, 1999. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The derivative's change in
fair value, which is not directly offset by hedging, will be immediately
recognized in earnings.
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16
RECLASSIFICATIONS - Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation. These
reclassifications had no effect on previously recorded net income or
shareholders' equity.
NOTE 3 - MEXICAN TRANSACTION
During the first quarter of 1995, the Company entered into a joint venture
with Arancia, S.A. de C.V. (the "Joint Venture"), a corn refining business
located in Mexico. This investment had been accounted for under the equity
method. In October 1998, the Company entered into certain agreements to
acquire the remaining interest in its joint venture in three transactions
over the next several years. The closing of the initial transaction
occurred on December 1, 1998, whereby the Company obtained effective
control of the Joint Venture through the issuance of common stock and the
payment of cash. The Company has the option to acquire all of the remaining
interest in the Joint Venture in two additional transactions. The
acquisition has been accounted for under the purchase method of accounting.
The fair value of the net assets of the joint venture at December 1, 1998
was $136 million, in addition the Company recorded goodwill of $127
million. The Company has reflected the series of transactions as if they
were completed on December 1, 1998. The future installment payments are
reflected as minority stockholder's interest and will accrue interest at
the same rate as the Company's short term US credit facility, which at
December 31, 1998, was 5.45%.
The acquired assets and assumed liabilities as of December 1, 1998 were
composed of the following:
(in millions)
- -------------------------------------------------------------
Working capital $ 51
Fixed assets 266
Other assets 3
Long term debt 152
Other liabilities 32
Had the acquisition been made at the beginning of 1997, the Company's pro forma
unaudited results would have been:
(in millions, except per share amounts)
Year ended December 31 1998 1997
- -------------------------------------------------------------------
Net sales $1,784 $1,744
Net earnings (loss) 46 (84)
Earnings (loss) per share 1.22 (2.30)
The unaudited pro forma results are not necessarily indicative of the
results that would have been attained had the acquisition occurred at the
beginning of 1998 or of results that may be expected in the future.
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17
NOTE 4 - SPIN-OFF AND RESTRUCTURING
SPIN-OFF FROM AND TRANSACTIONS WITH CPC, NOW BESTFOODS
On December 31, 1997, CPC distributed 100 percent of the Corn Products
common stock through a special dividend to its shareholders. After the
spin-off, CPC had no direct ownership of the Company. In connection with
the spin-off, the Company entered into various agreements for the purpose
of governing certain of the ongoing relationships between CPC and the
Company after the distribution.
The Company has entered into a tax indemnification agreement that requires
the Company to indemnify CPC against tax liabilities arising from the loss
of the tax-free reorganization status of the spin-off. This agreement could
restrict the Company, for a two-year period ending December 31, 1999, from
entering into certain transactions, including limitations on the
liquidation, merger or consolidation with another company, certain issuance
and redemption of our common stock and the distribution or sale of certain
assets.
A master supply agreement was negotiated to supply CPC and its affiliates
with certain corn refining products at prices based generally on prevailing
market conditions for a minimum two-year term, ending December 31, 1999,
which can be renewed upon the agreement of both parties. The Company had
sales to CPC for the year ended December 31, 1998, of $161 million. Prior
to the spin-off, intercompany sales with CPC for the years ended December
31, 1997, and 1996, amounted to $177 million, and $157 million,
respectively.
RESTRUCTURING CHARGES - NET AND SPIN-OFF COSTS
In 1997, the Company recorded a $94 million pretax restructuring charge and
a $15 million pre-tax spin-off charge from CPC. The restructuring charge,
$76 million of which was utilized in 1997, and $9 million of which was
utilized in 1998, includes the costs of the separation of facilities that
were used by CPC to produce both consumer foods and corn-derived products,
employee costs, and other charges. The spin-off charge utilized entirely
during 1997 encompassed the direct costs of the spin-off, including legal,
tax and investment banking fees. The remaining $9 million will be utilized
in 1999.
NOTE 5 - FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash equivalents, accounts receivable, accounts
payable and debt approximate fair values.
COMMODITIES
At December 31, 1998 and 1997, the Company had open corn commodity futures
contracts of $295 million and $154 million, respectively. Contracts open
for delivery beyond March 31, 1999, amounted to $224 million, of which $61
million is due in May 1999, $56 million is due in July 1999, $41 million is
due in September 1999, $55 million is due in December 1999, and $11 million
is due in March 2000. At December 31, 1998, the price of corn under these
contracts was $12 million above market quotations of the same date.
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18
NOTE 6 - FINANCING ARRANGEMENTS
The Company had total debt outstanding of $404 million and $350 million on
December 31, 1998 and 1997, respectively. Short-term borrowings in the
United States and Canada consist primarily of unsecured credit lines, which
provide for a maximum of $340 million and $49 million, respectively in
borrowings. In addition the Company has various local country lines of
credit for operations.
At December 31, short-term borrowings consist of the following:
(in millions) 1998 1997
---- ----
US revolving credit facility (5.45%) $152 $190
Canadian line of credit (5.40% - 6.75% interest) 24 100
Other borrowings in various currencies (6.30% - 46% interest) 67 44
Current portion of long-term debt 7 3
-------------------------------------------------------------------------------
Total $250 $337
===============================================================================
Long-term debt consists of the following at December 31:
(in millions) 1998 1997
---- ----
Mexican Export Credit, due 2000 at LIBOR + 1.49% $ 24 $ --
Mexican Import Credit Facility, due 2001 at LIBOR + 1.75% 40 --
Mexican Import Credit Facility, due 2007 at LIBOR + 3.30% 60 --
Other, due in varying amounts through 2007, fixed and floating
interest rates ranging from 5.9% - 18% 39 16
-------------------------------------------------------------------------------
Total $161 $ 16
-------------------------------------------------------------------------------
Less current maturities 7 3
-------------------------------------------------------------------------------
Long-term debt $154 $ 13
===============================================================================
Maturities of long-term debt are $31 million in 2000, $47 million in 2001,
$4 million in 2002, $72 million in 2003 and thereafter. The LIBOR rate at
December 31, 1998 was 5.06%.
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19
NOTE 7 - LEASES
The Company leases rail cars and certain machinery and equipment under
various operating leases. Rental expense under operating leases was $18.7
million, $18.3 million, and $12.2 million in 1998, 1997 and 1996,
respectively. Minimum lease payments existing at December 31, 1998 are
shown below:
- ----------------------------------------------------------------------
(IN MILLIONS)
YEAR MINIMUM LEASE PAYMENT
- ----------------------------------------------------------------------
1999 $16.9
2000 15.1
2001 10.1
2002 7.3
Balance thereafter 34.3
NOTE 8 - INCOME TAXES
Income before income taxes and the components of the provision for income
taxes are shown below:
- -------------------------------------------------------------------------
(in millions) 1998 1997 1996
- -------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES:
United States $ 8 $(128) $ (20)
Outside the United States 63 39 57
- -------------------------------------------------------------------------
Total $ 71 $ (89) $ 37
- -------------------------------------------------------------------------
PROVISION FOR INCOME TAXES:
Current tax expense
US federal 1 (31) 27
State and local 1 (4) (2)
Foreign 13 6 4
- -------------------------------------------------------------------------
Total current $ 15 $ (29) $ 29
- -------------------------------------------------------------------------
Deferred tax expense (benefit)
US federal 5 7 (22)
State and local -- 2 1
Foreign 5 1 4
- -------------------------------------------------------------------------
Total deferred 10 10 (17)
- -------------------------------------------------------------------------
Total provision (benefit) $ 25 $ (19) $ 12
=========================================================================
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NOTE 8 - INCOME TAXES (CONTINUED)
The tax effects of significant temporary differences, which comprise the
deferred tax liabilities and assets at December 31, 1998 and 1997, are as
follows:
- ----------------------------------------------------------------
(in millions) 1998 1997
- ----------------------------------------------------------------
Plants and properties $210 $134
Pensions -- 13
- ----------------------------------------------------------------
Gross deferred tax liabilities 210 147
- ----------------------------------------------------------------
Restructuring reserves 2 11
Employee benefit reserves 11 14
Pensions 4 --
Other 35 14
- ----------------------------------------------------------------
Gross deferred tax assets 52 39
- ----------------------------------------------------------------
Valuation allowance 2 --
- ----------------------------------------------------------------
Total deferred tax liabilities $156 $108
================================================================
Total net deferred tax liabilities and assets shown above included current
and non-current elements. CPC is responsible for substantially all income
taxes prior to December 31, 1997, under the terms of the distribution;
accordingly the valuation allowance was reduced to zero at December 31,
1997. The Company recorded a valuation allowance in the amount of $2
million at December 31, 1998, to reflect the estimated amount of deferred
tax assets which, more likely than not, will not be realized.
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate follows:
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Provision for tax at US statutory rate 35.0% (35.0)% 35.0%
Taxes related to foreign income (2.3) (7.5) (0.6)
State and local taxes - net 0.5 (1.5) (0.5)
Restructuring and spin-off charges -- 14.0 --
Other items - net 1.8 8.7 (0.3)
- ---------------------------------------------------------------------------
Provision at effective tax rate 35.0% (21.3)% 33.6%
===========================================================================
The effective tax rate in 1998 was 35 percent. This reflects foreign tax
rates in countries where statutory rates are lower than the US statutory
rate.
The effective rate in 1997 on the tax benefit of 21.3 percent derived from
a lower benefit associated with the restructuring and spin-off charges,
lower tax on average from foreign jurisdictions and an assumed rate for CPC
International Inc.
Taxes that would result from dividend distributions by foreign subsidiaries
to the United States are provided to the extent dividends are anticipated.
As of December 31, 1998, approximately $214 million of retained earnings of
foreign subsidiaries are retained indefinitely by the subsidiaries for
capital and operating requirements.
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21
NOTE 9 - PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company and its subsidiaries have a number of non-contributory
defined benefit pension plans covering substantially all employees in the
US and Canada, including 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 services. The Company's general
funding policy is to provide contributions within the limits of
deductibility under current tax regulations. Certain foreign countries
allow income tax deductions without regard to contribution levels, and the
Company's policy in those countries is to make the contribution required by
the terms of the plan. Domestic plan assets consist primarily of common
stock, real estate, corporate debt securities and short-term investment
funds.
Effective January 1, 1998, the plan for domestic salaried employees was
amended to a defined benefit "cash balance" pension plan, which provides
benefits based on service and company credits to the employee's accounts of
between 3 percent and 10 percent of base salary, bonus and overtime.
The Company also provides health care and life insurance benefits for
retired employees in the United States and Canada. Effective January 1,
1998, the Company amended its US post-retirement medical plans for
salaried employees to provide Retirement Health Care Spending Accounts. The
Company provides access to retiree medical insurance post-retirement. US
salaried employees accrue an account during employment, which can be used
after employment to purchase post-retirement medical insurance from the
Company and Medigap or Medicare HMO policies after age 65. The accounts are
credited with a flat dollar amount, indexed for inflation annually during
employment. The accounts accrue interest credits using a rate equal to a
specified amount above the yield on 5-year Treasury notes. These employees
become eligible for benefits when they meet minimum age and service
requirements. The Company accrues a flat dollar amount on an annual basis
for each domestic salaried employee. These amounts, plus credited interest,
can be used to purchase post-retirement medical insurance. The Company has
the right to modify or terminate these benefits.
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NOTE 9 - PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
A reconciliation of the changes in the plans' benefit obligations, fair
value of assets, and the plans' funded status reconciled to the amounts
recognized on the balance sheet on December 31, 1998 and 1997 are as
follows:
PENSION BENEFITS OTHER BENEFITS
(in millions) 1998 1997 1998 1997
CHANGE IN BENEFITS OBLIGATION
Benefit obligation at beginning of year $ 97 147 $ 15 13
Service cost 3 4 1 1
Interest cost 7 7 1 1
Benefit obligation transferred -- (60) -- --
Benefits paid (3) (1) -- --
- ---------------------------------------------------------------------------------------
Benefit obligation at end of year $ 104 97 $ 17 15
=======================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 105 141 -- --
Actual return on plan assets 7 25 -- --
Plan assets transferred -- (60) -- --
Benefits paid (3) (1) -- --
- ---------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 109 105 -- --
=======================================================================================
Funded status $ 5 $ 8 ($ 17) ($ 15)
Unrecognized net actuarial loss (gain) (19) (24) -- (1)
Unrecognized prior service cost 5 5 (5) (4)
Unrecognized transition obligation -- (1) -- --
- ---------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost ($ 9) ($ 12) ($ 22) ($ 20)
=======================================================================================
For pension plans with an accumulated benefit obligation ("ABO") in excess
of plan assets, both the projected benefit obligation ("PBO") and ABO
exceeded the fair value of the plan assets by $5 million as of December 31,
1998. The PBO and ABO exceed the fair value of the plan assets by $5 and $6
million, respectively as of December 1997. The plans are unfunded.
The following table provides the components of net periodic benefit costs
for the plans for the years ended December 31:
PENSION BENEFITS OTHER BENEFITS
- ------------------------------------------------------------------------------------
(in millions) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------
Service cost $ 3 $ 4 $ 4 $ 1 $ 1 $ 1
Interest cost 7 7 10 1 1 4
Actual return on plan assets (7) (25) (18) -- -- --
Net amortization and deferral (2) 17 8 (1) -- (1)
- -----------------------------------------------------------------------------------
Net periodic benefit cost $ 1 $ 3 $ 4 $ 1 $ 2 $ 4
===================================================================================
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NOTE 9 - PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
The weighted average assumptions used in accounting for the Company's
benefits at December 31 are as follows:
PENSION BENEFITS OTHER BENEFITS
1998 1997 1996 1998 1997 1996
Discount rates 6.75% 7.0% 7.5% 6.75% 7.5% 7.0%
Rate of compensation increase 3.75% 5.0% 5.5% -- -- --
Expected return on plan assets 8.25% 10.0% 8.6% -- -- --
================================================================================================
Annual increases in per capita cost of health care benefits of 9.5 percent
pre-age-65 and 7.5 percent post-age-65 were assumed for 1998 to 1999. Rates
were assumed to decrease by 1 percent thereafter until reaching 4.5
percent. Increasing the assumed health care cost trend rate by 1 percent
increases the APBO at December 31, 1998 by $1.5 million, with a
corresponding effect on the service and interest cost components of the net
periodic post-retirement benefit cost for the year then ended of $0.2
million.
In addition to the defined benefit plans, the Company sponsors
defined-contribution pension plans covering certain domestic and foreign
employees. Contributions are determined by matching a percentage of
employee contributions. Expense recognized in 1998, 1997 and 1996 was $4.6
million, $3.6 million and $2.9 million, respectively.
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NOTE 10 - SUPPLEMENTARY BALANCE SHEET INFORMATION
Supplementary Balance Sheet Information is set forth below:
- -------------------------------------------------------------------------------------------
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE - NET
Accounts receivable - trade $ 193 $ 146
Accounts receivable - other 36 40
Allowance for doubtful accounts (5) (4)
- -------------------------------------------------------------------------------------------
Total accounts receivable - net 224 182
- -------------------------------------------------------------------------------------------
INVENTORIES
Finished and in process 110 51
Raw materials 43 43
Manufacturing supplies 22 29
- -------------------------------------------------------------------------------------------
Total inventories 175 123
- -------------------------------------------------------------------------------------------
ACCRUED LIABILITIES
Compensation expenses 2 2
Dividends payable 3 --
Accrued interest 3 --
Restructuring reserves 9 18
Taxes payable other than taxes on income 12 10
Other 30 39
- -------------------------------------------------------------------------------------------
Total accrued liabilities 59 69
- -------------------------------------------------------------------------------------------
NONCURRENT LIABILITIES
Employee's pension, indemnity, retirement, and related provisions 35 35
Other noncurrent liabilities 28 2
- -------------------------------------------------------------------------------------------
Total noncurrent liabilities 63 37
===========================================================================================
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NOTE 11 - STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has authorized 200 million shares of $0.01 par value common
stock. On December 31, 1997, 35.6 million shares were distributed to the
shareholders of CPC.
During 1998, the Company issued 1,764,706 common shares in connection with
the purchase of the controlling interest of Arancia-CPC, S.A. In addition,
the Company substituted 143,018 restricted common shares upon the spin-off,
and issued 36,600 additional restricted shares and 72,712 common shares
upon the exercise of stock options under the stock option plan.
PREFERRED STOCK AND STOCKHOLDER'S RIGHTS PLAN
The Company has authorized 25 million shares of $0.01 par value preferred
stock of which one million shares were designated as Series A Junior
Participating Preferred Stock for the stockholder's rights plan. Under this
plan, each share of the Corn Products Common Stock issued in the
distribution 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 on or before December
31, 1999, a person or group acquires or announces a tender offer that would
result in the acquisition of 10 percent or more of the Corn Products Common
Stock or after December 31, 1999 would result in the acquisition of 15
percent or more of the Corn Products 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 10 percent or
more stockholder on or before December 31, 1999 or a 15 percent or more
stockholder thereafter, 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 10 or 15 percent
stockholder (as applicable) engages in certain self-dealing transactions or
acquires the Company in such a manner that the Corn Products International
and its common stock survive, or if any person acquires 10 or 15 percent or
more of the Corn Products Common Stock (as applicable), except pursuant to
an offer for all shares at a fair price, each full right not owned by a 10
or 15 percent or more stockholder may be exercised for Corn Products 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 10 or 15
percent or more of its voting securities (as applicable). Unless redeemed
earlier, the rights will expire on December 31, 2007.
TREASURY STOCK
The Company purchased on the open market 33,000 shares of its common stock
at an aggregate purchase price of $28.70 per share, during the year ended
December 31, 1998. Also, the Company, acquired 18,454 shares of its common
stock through conversion from cancelled restricted shares and repurchase
from employees under the stock option plan at an aggregate purchase price
of $30.76 per share, or fair value at the date of purchase. All of the
acquired shares are held as common stock in treasury, less shares issued to
employees under the stock option plan.
STOCK OPTION PLAN
The Company has established stock option plan for certain key employees. In
addition, all
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26
NOTE 11 - STOCKHOLDERS' EQUITY (CONTINUED)
existing CPC stock options of Company employees were converted to stock
options to acquire Corn Products Common Stock. These stock options retain
their vesting schedules and existing expiration dates.
During January through November 1998, the Company granted additional
options to purchase 1,097,200 shares of common stock. These options are
exercisable upon vesting, and vest at one and two-year anniversary dates
from the date of grant. As of December 31, 1998, certain of these
non-qualified options have been forfeited due to the termination of
employees.
In addition to stock options, 143,018 shares were converted under the
restricted stock award provisions of the plan at December 31, 1997. During
1998, the Company granted an additional 36,600 of these awards. The cost of
these awards is being amortized over the restriction period.
Under the provisions of FAS 123, the Company accounts for stock-based
compensation using the intrinsic value method prescribed by APB 25. On a
pro forma basis, net income would have been $38 million or $1.05 per share
in 1998 and a loss of $76 million or $2.13 per share in 1997. For purposes
of this pro forma disclosure under SFAS 123, the estimated fair value of
the awards is amortized to expense over the awards' vesting period.
The fair value of the awards was estimated at the grant date using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1998, 1997, and 1996 respectively: risk-free interest rates
of 5.67, 6.57 and 6.54 percent; volatility factor of 35 percent; and a
weighted average expected life of the awards of 5 years.
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 year
ended December 31, 1998 follows:
STOCK RESTRICTED
Number of shares: OPTIONS STOCK
- --------------------------------------------------------------------------
Outstanding at beginning of year 477,371 143,018
Granted 1,097,200 36,600
Exercised / vested (72,712) (44,598)
Canceled (23,353) (12,644)
Outstanding at end of year 1,478,506 122,376
- -------------------------------------------------------------------------
Exercisable at end of year 393,806 --
- -------------------------------------------------------------------------
Price range at end of year $13.06-32.31 --
- -------------------------------------------------------------------------
Weighted average exercise price $ 29.24 --
- -------------------------------------------------------------------------
Weighted average fair value of options
granted during the current year $ 11.38
- -------------------------------------------------------------------------
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NOTE 12 - GEOGRAPHIC INFORMATION
The Company operates in one business segment - Corn Refining - and is
managed on a geographic regional basis. Its North American Operations
include its wholly-owned Corn Refining businesses in the United States and
Canada and majority ownership in Mexico. Its Rest of World businesses
include primarily 100 percent owned Corn Refining operations in South
America, and joint ventures and alliances in Asia, Africa and other areas.
Also included in this group is its North American enzyme business.
- -----------------------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
SALES TO UNAFFILIATED CUSTOMERS:
North America $ 916 $ 871 $ 1,030
Rest of the World 532 547 494
- -----------------------------------------------------------------------------------------------
Total $ 1,448 $ 1,418 $ 1,524
===============================================================================================
OPERATING INCOME:
North America 18 $ (32) $ 14
Rest of the World 76 82 51
Corporate (10) (2)
Restructuring and spin-off costs -- (109)* --
- -----------------------------------------------------------------------------------------------
TOTAL $ 84 $ (61) $ 65
===============================================================================================
TOTAL ASSETS:
North America $ 1,316 $ 1,089 $ 1,037
Rest of the World 630 577 611
- -----------------------------------------------------------------------------------------------
TOTAL $ 1,946 $ 1,666 $ 1,648
===============================================================================================
DEPRECIATION AND AMORTIZATION:
North America $ 63 $ 63 $ 60
Rest of the World 32 32 28
- -----------------------------------------------------------------------------------------------
TOTAL $ 95 $ 95 $ 88
===============================================================================================
CAPITAL EXPENDITURES:
North America $ 40 $ 53 $ 77
Rest of the World 51 47 115
- -----------------------------------------------------------------------------------------------
TOTAL $ 91 $ 100 $ 192
===============================================================================================
All data for Rest of World is based on a 12-month fiscal year.
*1997 includes a $30 million charge from CPC for consumer and corporate
restructuring; $30 million for North American corn refining; $49 million for
restructuring other.
NOTE 13 - SUBSEQUENT EVENTS
On January 14, 1999, the Company acquired the corn wet milling business of
Bang IL Industrial Co., Ltd., a Korean corporation through an asset
purchase for $65 million. The assets purchased included the net working
capital, plant, property and equipment of the corn wet milling business.
The acquisition was funded primarily from a combination of debt both in the
United States and from local banking sources.
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28
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA
Summarized quarterly financial data is as follows:
- --------------------------------------------------------------------------------------
(in millions, except per share amounts) 1st QTR 2nd QTR 3rd QTR 4th QTR
- --------------------------------------------------------------------------------------
1998
Net sales $ 339 $ 367 $ 359 $ 383
Gross profit 39 40 44 48
Net income 8 11 13 11
Basic earnings per common share $0.22 $0.30 $0.35 $0.32
Diluted earnings per common share $0.22 $0.30 $0.35 $0.32
- -------------------------------------------------------------------------------------
1997
Net sales $ 337 $ 358 $ 360 $ 363
Gross profit 21 33 42 42
Restructuring and spin-off charges - net -- 65 18 --
Net income (loss) (9) (64) (10) 11
Basic earnings per common share ($0.25) ($1.79) ($0.28) $0.30
Diluted earnings per common share ($0.25) ($1.79) ($0.28) $0.30
- -------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------
1st QTR 2nd QTR 3rd QTR 4th QTR
- --------------------------------------------------------------------------------------
1998
Market price range of common stock
High $35.87 $38.31 $33.82 $30.37
Low 27.00 31.50 23.25 23.00
Close 35.87 33.87 25.25 30.37
- --------------------------------------------------------------------------------------
Dividends declared per common share -- -- $ 0.08 $ 0.08
- --------------------------------------------------------------------------------------
The number of shareholders of the Company's stock at December 31, 1998 was
approximately 21,000.
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29
SIX-YEAR FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------
(in millions, except per share amounts) 1998 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales $ 1,448 $ 1,418 $ 1,524 $ 1,387 $ 1,385 $ 1,243
Restructuring and spin-off charges - net -- 83 -- (23) 12 --
Net income (loss) 43 (75) 23 135 100 99
Basic earnings per common share $ 1.19 $ (2.10) $ 0.64 $ 3.79 $ 2.81 $ 2.78
Cash dividend declared per common share $ 0.16 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $ 60 $ (73) $ 147 $ 31 $ 106 $ 33
Plants and properties - net 1,298 1,057 1,057 920 830 792
Total assets 1,946 1,666 1,663 1,306 1,207 1,110
Total debt 404 350 350 363 294 209
Stockholders' equity 1,053 986 1,025 600 550 484
Shares outstanding, year-end in millions 37.6 35.6 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
STATISTICAL DATA(1)
Depreciation and amortization $ 95 $ 95 $ 88 $ 82 $ 80 $ 78
Capital expenditures 91 100 192 188 145 122
Maintenance and repairs 67 69 61 65 65 57
Total employee costs 131 142 170 164 149 177
- -----------------------------------------------------------------------------------------------------------------
(1) All data is based on a 12 month fiscal year
36