10-K 1 a13-24815_110k.htm 10-K

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

x       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013

 

or

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from     to

 

Commission file number 1-13397

 

INGREDION INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

22-3514823

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer

 

 

Identification No.)

 

 

 

5 Westbrook Corporate Center, Westchester, Illinois

 

60154

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (708) 551-2600

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $.01 par value per share

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: NONE

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No  o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o No x

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer [X]

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The aggregate market value of the Registrant’s voting stock held by non-affiliates of the Registrant (based upon the per share closing price of $65.62 on June 28, 2013, and, for the purpose of this calculation only, the assumption that all of the Registrant’s directors and executive officers are affiliates) was approximately $4,844,000,000.

 

The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of February 20, 2014, was 74,492,000.

 

Documents Incorporated by Reference:

 

Information required by Part III (Items 10, 11, 12, 13 and 14) of this document is incorporated by reference to certain portions of the Registrant’s definitive Proxy Statement (the “Proxy Statement”) to be distributed in connection with its 2013 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2013.

 

 

 



Table of Contents

 

INGREDION INCORPORATED

FORM 10-K
TABLE OF CONTENTS

 

 

 

Page

Part I

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

13

Item 1B.

Unresolved Staff Comments

19

Item 2.

Properties

19

Item 3.

Legal Proceedings

20

Item 4.

Mine Safety Disclosures

21

Part II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

21

Item 6.

Selected Financial Data

23

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

45

Item 8.

Financial Statements and Supplementary Data

48

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

89

Item 9A.

Controls and Procedures

89

Item 9B.

Other Information

89

Part III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

90

Item 11.

Executive Compensation

90

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

90

Item 13.

Certain Relationships and Related Transactions, and Director Independence

90

Item 14.

Principal Accountant Fees and Services

90

Part IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

90

 

 

 

Signatures

 

96

 

2


 


Table of Contents

 

PART I.

 

ITEM 1.  BUSINESS

 

The Company

 

Ingredion Incorporated (“Ingredion”) is a leading global manufacturer and supplier of starch and sweetener ingredients to a range of industries, including packaged food, beverage, brewing and industrial customers.  Ingredion was incorporated as a Delaware corporation in 1997 and its common stock is traded on the New York Stock Exchange.  On October 1, 2010, Ingredion acquired National Starch, a global developer and manufacturer of specialty and modified starches for a cash purchase price of $1.369 billion.  The acquisition provided Ingredion with a broader portfolio of products, enhanced geographic reach and the ability to offer customers a broad range of value added ingredient solutions for a variety of their evolving needs.

 

For purposes of this report, unless the context otherwise requires, all references herein to the “Company,” “Ingredion,” “we,” “us,” and “our” shall mean Ingredion Incorporated and its subsidiaries.

 

Ingredion supplies a broad range of customers in many diverse industries around the world, including the food, beverage, brewing, pharmaceutical, paper and corrugated products, textile and personal care industries, as well as the global animal feed and corn oil markets.

 

Our product line includes starches and sweeteners, animal feed products and edible corn oil.  Our starch-based products include both food-grade and industrial starches.  Our sweetener products include glucose syrups, high maltose syrups, high fructose corn syrup (“HFCS”), caramel color, dextrose, polyols, maltodextrins and glucose and syrup solids.

 

Our products are derived primarily from the processing of corn and other starch-based materials, such as tapioca, potato and rice.

 

Our manufacturing process is based on a capital-intensive, two-step process that involves the wet milling and processing of starch-based materials, primarily corn.  During the front-end process, corn is steeped in a water-based solution and separated into starch and co-products such as animal feed and corn oil.  The starch is then either dried for sale or further processed to make sweeteners, starches and other ingredients that serve the particular needs of various industries.

 

We believe our approach to production and service, which focuses on local management and production improvements of our worldwide operations, provides us with a unique understanding of the cultures and product requirements in each of the geographic markets in which we operate, bringing added value to our customers through innovative solutions.

 

Our consolidated net sales were $6.33 billion in 2013.  Approximately 58 percent of our 2013 net sales were provided from our North American operations. Our South American operations provided 21 percent of net sales, while our Asia Pacific and EMEA (Europe, Middle East and Africa) operations contributed approximately 13 percent and 8 percent, respectively.

 

Products

 

Sweetener Products. Our sweetener products represented approximately 42 percent, 44 percent and 43 percent of our net sales for 2013, 2012 and 2011, respectively.

 

Glucose Syrups: Glucose syrups are fundamental ingredients widely used in food products, such as baked goods, snack foods, beverages, canned fruits, condiments, candy and other sweets, dairy products, ice cream, jams and jellies, prepared mixes and table syrups.  Glucose syrups offer functionality in addition to sweetness to processed foods.  They add body and viscosity; help control freezing points, crystallization and

 

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browning; add humectancy (ability to add moisture) and flavor; and act as binders.

 

High Maltose Syrup: This special type of glucose syrup is primarily used as a fermentable sugar in brewing beers. High maltose syrups are also used in the production of confections, canning and some other food processing applications.  Our high maltose syrups speed the fermentation process, allowing brewers to increase capacity without adding capital.

 

High Fructose Corn Syrup: High fructose corn syrup is used in a variety of consumer products including soft drinks, fruit-flavored beverages, baked goods, dairy products, confections and other food and beverage products.  In addition to sweetness and ease of use, high fructose corn syrup provides body; humectancy; and aids in browning, freezing point and crystallization control.

 

Dextrose: Dextrose has a wide range of applications in the food and confection industries, in solutions for intravenous and other pharmaceutical applications, and numerous industrial applications like wallboard, biodegradable surface agents and moisture control agents. Dextrose functionality in foods, beverages and confectionary includes sweetness control; body and viscosity; acts as a bulking, drying and anti-caking agent; serves as a carrier; provides freezing point and crystallization control; and aids in fermentation.  Dextrose is also a fermentation agent in the production of light beer.  In pharmaceutical applications dextrose is used in IV solutions as well as an excipient suitable for direct compression in tableting.

 

Polyols:  These products are sugar-free, reduced calorie sweeteners primarily derived from starch or sugar for the food, beverage, confectionery, industrial, personal and oral care, and nutritional supplement markets.  In addition to sweetness, polyols inhibit crystallization; provide binding, humectancy and plasticity; add texture; extend shelf life; prevent moisture migration; and are an excipient suitable for tableting.

 

Maltodextrins and Glucose Syrup Solids: These products have a multitude of food applications, including formulations where liquid syrups cannot be used. Maltodextrins are resistant to browning, provide excellent solubility, have a low hydroscopicity (do not retain moisture), and are ideal for their carrier/bulking properties. Glucose syrup solids have a bland flavor, remain clear in solution, are easy to handle and provide bulking properties.

 

Starch Products.  Our starch products represented approximately 41 percent, 37 percent and 36 percent of our net sales for 2013, 2012 and 2011, respectively.  Starches are an important component in a wide range of processed foods, where they are used for adhesion, clouding, dusting, expansion, fat replacement, freshness, gelling, glazing, mouth feel, stabilization and texture. Cornstarch is sold to cornstarch packers for sale to consumers.  Starches are also used in paper production to create a smooth surface for printed communications and to improve strength in recycled papers. Specialty starches are used for enhanced drainage, fiber retention, oil and grease resistance, improved printability and biochemical oxygen demand control. In the corrugating industry, starches and specialty starches are used to produce high quality adhesives for the production of shipping containers, display board and other corrugated applications.  The textile industry uses starches and specialty starches for sizing (abrasion resistance) to provide size and finishes for manufactured products.  Industrial starches are used in the production of construction materials, textiles, adhesives, pharmaceuticals and cosmetics, as well as in mining, water filtration and oil and gas drilling. Specialty starches are used for biomaterial applications including biodegradable plastics, fabric softeners and detergents, hair and skin care applications, dusting powders for surgical gloves and in the production of glass fiber and insulation.

 

Co-Products and others.  Co-products and others accounted for 17 percent, 19 percent and 21 percent of our net sales for 2013, 2012 and 2011, respectively.  Refined corn oil (from germ) is sold to packers of cooking oil and to producers of margarine, salad dressings, shortening, mayonnaise and other foods.  Corn gluten feed is sold as animal feed. Corn gluten meal is sold as high-protein feed for chickens, pet food and aquaculture.

 

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Geographic Scope and Operations

 

We are principally engaged in the production and sale of sweeteners and starches for a wide range of industries, and we manage our business on a geographic regional basis.  Our operations are classified into four reportable business segments: North America, South America, Asia Pacific and EMEA.  In 2013, approximately 58 percent of our net sales were derived from operations in North America, while net sales from operations in South America represented 21 percent.  Our Asia Pacific and EMEA operations represented approximately 13 percent and 8 percent of our net sales, respectively.  See Note 12 of the notes to the consolidated financial statements entitled “Segment Information” for additional financial information with respect to our reportable business segments.

 

In general, demand for our products is balanced throughout the year.  However, demand for sweeteners in South America is greater in the first and fourth quarters (its summer season) while demand for sweeteners in North America is greater in the second and third quarters.  Due to the offsetting impact of these demand trends, we do not experience material seasonal fluctuations in our net sales.

Our North America segment consists of operations in the US, Canada and Mexico. The region’s facilities include 13 plants producing a wide range of both sweeteners and starches.

 

We are the largest manufacturer of corn-based starches and sweeteners in South America, with sales in Argentina, Brazil, Chile, Colombia, Ecuador, Peru and Uruguay.  Our South America segment includes 11 plants that produce regular, modified, waxy and tapioca starches, high fructose and high maltose syrups and syrup solids, dextrins and maltodextrins, dextrose, specialty starches, caramel color, sorbitol and vegetable adhesives.

 

Our Asia Pacific segment manufactures corn-based products in South Korea, Australia and China.  Also, we manufacture tapioca-based products in Thailand, which supplies not only our Asia Pacific segment but the rest of our global network.  The region’s facilities include 7 plants that produce modified, specialty, regular, waxy and tapioca starches, dextrins, glucose, high maltose syrup, dextrose, HFCS and caramel color.

 

Our EMEA segment includes 5 plants that produce modified and specialty starches, glucose and dextrose in England, Germany and Pakistan.

 

Additionally, we utilize a network of tolling manufacturers in various regions in the production cycle of certain specialty starches.  In general, these tolling manufacturers produce certain basic starches for us, and we in turn complete the manufacturing process of the specialty starches through our finishing channels.

 

We utilize our global network of manufacturing facilities to support key global product lines.

 

Competition

 

The starch and sweetener industry is highly competitive.  Many of our products are viewed as basic ingredients that compete with virtually identical products and derivatives manufactured by other companies in the industry.  The US is a highly competitive market where there are other starch processors, several of which are divisions of larger enterprises.  Some of these competitors, unlike us, have vertically integrated their starch processing and other operations.  Competitors include ADM Corn Processing Division (“ADM”) (a division of Archer-Daniels-Midland Company), Cargill, Inc., Tate & Lyle Ingredients Americas, Inc., and several others. Our operations in Mexico and Canada face competition from US imports and local producers including ALMEX, a Mexican joint venture between ADM and Tate & Lyle Ingredients Americas, Inc.  In South America, Cargill has starch processing operations in Brazil and Argentina.  Many smaller local corn and tapioca refiners also operate in many of our markets. Competition within our markets is largely based on price, quality and product availability.

 

Several of our products also compete with products made from raw materials other than corn. HFCS and monohydrate dextrose compete principally with cane and beet sugar products. Co-products such as corn oil and gluten meal compete with products of the corn dry milling industry and with soybean oil, soybean meal and other products. Fluctuations in prices of these competing products may affect prices of, and profits derived from, our products.

 

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Customers

 

We supply a broad range of customers in over 60 industries worldwide.  The following table provides the percentage of total net sales by industry for each of our segments for 2013:

 

 

 

Total

 

North

 

South

 

 

 

 

 

Industries Served

 

Company

 

America

 

America

 

APAC

 

EMEA

 

 

 

 

 

 

 

 

 

 

 

 

 

Food

 

50

%

47

%

43

%

64

%

64

%

Beverage

 

14

%

19

%

12

%

7

%

1

%

Animal Nutrition

 

12

%

13

%

16

%

6

%

9

%

Paper and Corrugating

 

9

%

9

%

9

%

14

%

3

%

Brewing

 

8

%

7

%

14

%

4

%

0

%

Other

 

7

%

5

%

6

%

5

%

23

%

Total

 

100

%

100

%

100

%

100

%

100

%

 

Also noteworthy, approximately 19 percent of our net sales in 2013 were to customers that we regard as Global Accounts.  No customer accounted for 10 percent or more of our net sales in 2013, 2012 or 2011.

 

Raw Materials

 

Corn (primarily yellow dent) is the primary basic raw material we use to produce starches and sweeteners.  The supply of corn in the United States has been, and is anticipated to continue to be, adequate for our domestic needs. The price of corn, which is determined by reference to prices on the Chicago Board of Trade, fluctuates as a result of various factors including: farmers’ planting decisions, climate, and government policies (including those related to the production of ethanol), livestock feeding, shortages or surpluses of world grain supplies, and domestic and foreign government policies and trade agreements.  We also use tapioca, potato, rice and sugar as raw material.

 

Corn is also grown in other areas of the world, including Canada, Mexico, Europe, South Africa, Argentina, Australia, Brazil, China and Pakistan.  Our affiliates outside the United States utilize both local supplies of corn and corn imported from other geographic areas, including the United States.  The supply of corn for these affiliates is also generally expected to be adequate for our needs.  Corn prices for our non-US affiliates generally fluctuate as a result of the same factors that affect US corn prices.

 

We also utilize specialty grains such as waxy and high amylose corn in our operations.  In general, the planning cycle for our specialty grain sourcing begins three years in advance of the anticipated delivery of the specialty corn since the necessary seed must be grown in the season prior to grain contracting.  In order to secure these specialty grains at the time of our anticipated needs, we contract with certain farmers to grow the specialty corn approximately two years in advance of delivery.  These specialty grains are higher cost due to their more limited supply and require longer planning cycles to mitigate the risk of supply shortages.

 

Due to the competitive nature of our industry and the availability of substitute products not produced from corn, such as sugar from cane or beets, end product prices may not necessarily fluctuate in a manner that correlates to raw material costs of corn.

 

We follow a policy of hedging our exposure to commodity fluctuations with commodities futures and options contracts primarily for certain of our North American corn purchases.  We use derivative hedging contracts to protect the gross margin of our firm-priced business in North America.  Other business may or may not be hedged at any given time

 

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based on management’s judgment as to the need to fix the costs of our raw materials to protect our profitability.  Outside of North America, we generally enter into short-term commercial sales contracts and adjust our selling prices based upon the local raw material costs.  See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in the section entitled “Commodity Costs” for additional information.

 

Research and Development

 

We have global research and development capabilities concentrated in Bridgewater, New Jersey.  Activities at Bridgewater include plant science and physical, chemical and biochemical modifications to food formulations, food sensory evaluation, as well as development of non-food applications, such as starch-based biopolymers.  In 2013, we expanded our Bridgewater facility with the addition of a lab and sensory evaluation space dedicated to our sweeteners portfolio.  In addition, we have product application technology centers that direct our product development teams worldwide to create product application solutions to better serve the ingredient needs of our customers.  Product development activity is focused on developing product applications for identified customer and market needs.  Through this approach, we have developed value-added products for use by customers in various industries.  We usually collaborate with customers to develop the desired product application either in the customers’ facilities, our technical service laboratories or on a contract basis. These efforts are supported by our marketing, product technology and technology support staff.  Research and development expense for 2013 was approximately $37 million, or approximately one-half of one percent of our total net sales.

 

Sales and Distribution

 

Our salaried sales personnel, who are generally dedicated to customers in a geographic region, sell our products directly to manufacturers and distributors. In addition, we have a staff that provides technical support to our sales personnel on an industry basis.  We generally contract with trucking companies to deliver our bulk products to customer destinations. In North America, we generally use trucks to ship to nearby customers. For those customers located considerable distances from our plants, we use either rail or a combination of railcars and trucks to deliver our products. We generally lease railcars for terms of five to fifteen years.

 

Patents, Trademarks and Technical License Agreements

 

We own approximately 900 patents and patents pending which relate to a variety of products and processes, and a number of established trademarks under which we market our products. We also have the right to use other patents and trademarks pursuant to patent and trademark licenses. We do not believe that any individual patent or trademark is material to our business. There is no currently pending challenge to the use or registration of any of our significant patents or trademarks that would have a material adverse impact on us or our results of operations if decided against us.

 

Employees

 

As of December 31, 2013 we had approximately 11,300 employees, of which approximately 1,900 were located in the United States.  Approximately 35 percent of US and 47 percent of our non-US employees are unionized.  We have approximately 1,100 temporary employees.

 

Government Regulation and Environmental Matters

 

As a manufacturer and marketer of food items and items for use in the pharmaceutical industry, our operations and the use of many of our products are subject to various federal, state, foreign and local statutes and regulations, including the Federal Food, Drug and Cosmetic Act and the Occupational Safety and Health Act.  We and many of our products are also subject to regulation by various government agencies, including the United States Food and Drug Administration.   Among other things, applicable regulations prescribe requirements and establish standards for product quality, purity and labeling.  Failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines.  No such fines of a material nature were imposed on us in 2013.  We may also be required to comply with federal, state, foreign and local laws regulating food handling and storage.  We believe these laws and regulations have not negatively affected our competitive position.

 

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Our operations are also subject to various federal, state, foreign and local laws and regulations with respect to environmental matters, including air and water quality and underground fuel storage tanks, and other regulations intended to protect public health and the environment.  We operate industrial boilers that fire natural gas, coal, or biofuels to operate our manufacturing facilities and they are our primary source of greenhouse gas emissions.  In Argentina, we are in discussions with local regulators associated with conducting studies of possible environmental remediation programs at our Chacabuco plant.  We are unable to predict the outcome of these discussions; however, we do not believe that the ultimate cost of remediation will be material.  Based on current laws and regulations and the enforcement and interpretations thereof, we do not expect that the costs of future environmental compliance will be a material expense, although there can be no assurance that we will remain in compliance or that the costs of remaining in compliance will not have a material adverse effect on our future financial condition and results of operations.

 

During 2013, we spent approximately $8 million for environmental control and wastewater treatment equipment to be incorporated into existing facilities and in planned construction projects.  We currently anticipate that we will spend approximately $18 million and $5 million for environmental facilities and programs in 2014 and 2015, respectively.

 

Other

 

Our Internet address is www.ingredion.com.  We make available, free of charge through our Internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended.  These reports are made available as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission.  Our corporate governance guidelines, board committee charters and code of ethics are posted on our website, the address of which is www.ingredion.com, and each is available in print to any shareholder upon request in writing to Ingredion Incorporated, 5 Westbrook Corporate Center, Westchester, Illinois 60154 Attention: Corporate Secretary.  The contents of our website are not incorporated by reference into this report.

 

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Executive Officers of the Registrant

 

Set forth below are the names and ages of all of our executive officers, indicating their positions and offices with the Company and other business experience.  Our executive officers are elected annually by the Board to serve until the next annual election of officers and until their respective successors have been elected and have qualified unless removed by the Board.

 

Name

 

Age

 

Positions, Offices and Business Experience

 

 

 

 

 

Ilene S. Gordon

 

60

 

Chairman of the Board, President and Chief Executive Officer of the Company since May 4, 2009. Ms. Gordon was President and Chief Executive Officer of Rio Tinto’s Alcan Packaging, a multinational business unit engaged in flexible and specialty packaging, from October 2007 until she took office as Chairman of the Board, President and Chief Executive Officer of the Company. From December 2006 to October 2007, Ms. Gordon was a Senior Vice President of Alcan Inc. and President and Chief Executive Officer of Alcan Packaging. Alcan Packaging was acquired by Rio Tinto in October 2007. From 2004 until December 2006, Ms. Gordon served as President of Alcan Food Packaging Americas, a division of Alcan Inc. From 1999 until Alcan’s December 2003 acquisition of Pechiney Group, Ms. Gordon was a Senior Vice President of Pechiney Group and President of Pechiney Plastic Packaging, Inc., a global flexible packaging business. Prior to joining Pechiney in June 1999, Ms. Gordon spent 17 years with Tenneco Inc., where she most recently served as Vice President and General Manager, heading up Tenneco’s folding carton business. Ms. Gordon also serves as a director of International Paper Company, a global paper and packaging company. She served as a director of Arthur J. Gallagher & Co., an international insurance brokerage and risk management business, from 1999 to May 15, 2013 and as a director of United Stationers Inc., a wholesale distributor of business products and a provider of marketing and logistics services to resellers, from January 2000 until May 2009. Ms. Gordon also serves as a director of Northwestern Memorial Hospital, The Executives’ Club of Chicago, the Economic Club of Chicago, The Chicago Council on Global Affairs and World Business Chicago. She is also a trustee of The Conference Board. Ms. Gordon holds a Bachelor’s degree in mathematics from the Massachusetts Institute of Technology (MIT) and a Master’s degree in management from MIT’s Sloan School of Management.

 

 

 

 

 

Christine M. Castellano

 

48

 

Senior Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer since

 

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April 1, 2013. Prior to that Ms. Castellano served as Senior Vice President, General Counsel and Corporate Secretary from October 1, 2012 to March 31, 2013. Ms. Castellano previously served as Vice President International Law and Deputy General Counsel from April 28, 2011 to September 30, 2012, Associate General Counsel, South America and Europe from January 1, 2011 to April 27, 2011, and as Associate General International Counsel from 2004 to December 31, 2010. Prior to that, Ms. Castellano served as Counsel US and Canada from 2002 to 2004. Ms. Castellano joined CPC as Operations Attorney in September 1996 and held that position until 2002. Prior to joining CPC, Ms. Castellano was an income partner in the law firm McDermott Will & Emery from January 1, 1996 and had served as an associate in that firm from 1991 to December 31, 1996. She is a member of the board of trustees of the Peggy Notebaert Nature Museum. Ms. Castellano holds a Bachelor degree in political science from the University of Colorado and a Juris Doctor degree from the University of Michigan School of Law.

 

 

 

 

 

Ricardo de Abreu Souza

 

63

 

Senior Vice President and President, South America Ingredient Solutions since January 1, 2014. Prior to that Mr. de Abreu Souza served as President and General Manager of the Company’s Mexican subsidiary, from February 1, 2010 to December 31, 2013. Mr. de Abreu Souza previously served as Commercial Director of the Company’s Mexican subsidiary from 2006 to January 31, 2010. Prior thereto he served in positions of increasing responsibility since joining the Company in 1977. Mr. de Abreu Souza holds a Bachelor degree in chemical engineering from MacKenzie University in Sao Paulo, Brazil and a Master degree in business administration from IPADE Business School of Universidad Panamericana in Mexico.

 

 

 

 

 

Anthony P. DeLio

 

58

 

Senior Vice President and Chief Innovation Officer since January 1, 2014. Prior to that Mr. DeLio served as Vice President, Global Innovation from November 4, 2010 to December 31, 2013, and he served as Vice President, Global Innovation for National Starch from January 1, 2009 to November 3, 2010. Mr. DeLio served as Vice President and General Manager, North America, of National Starch from February 26, 2006 to December 31, 2008. Prior to that he served as Associate Vice Chancellor of Research at the University of Illinois at Urbana-Champaign from August 2004 to February 2006. Previously, Mr. DeLio served as Corporate Vice President of Marketing and External Relations of Archer Daniels Midland Company (“ADM”), one of the

 

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world’s largest processors of oilseeds, corn, wheat, cocoa and other agricultural commodities and a leading manufacturer of protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol and other value-added food and feed ingredients, from October 2002 to October 2003. Prior to that Mr. DeLio was President of the Protein Specialties and Nutraceutical Divisions of ADM from September 2000 to October 2002 and President of the Nutraceutical Division of ADM from June 1999 to September 2001. He held various senior product development positions with Mars, Inc. from 1980 to May 1999. Mr. DeLio holds a Bachelor of Science degree in chemical engineering from Rensselaer Polytechnic Institute.

 

 

 

 

 

Jack C. Fortnum

 

57

 

Executive Vice President and Chief Financial Officer since January 6, 2014. Prior to that Mr. Fortnum served as Executive Vice President and President, North America from February 1, 2012 to January 5, 2014. Mr. Fortnum previously served as Executive Vice President and President, Global Beverage, Industrial and North America Sweetener Solutions from October 1, 2010 to January 31, 2012. Prior thereto, Mr. Fortnum served as Vice President from 1999 to September 30, 2010 and President of the North America Division from May 2004 to September 30, 2010. Mr. Fortnum joined CPC in 1984 and held positions of increasing responsibility including serving as President, US/Canadian Region of the Company from July 2003 to May 2004. Mr. Fortnum is a member of the Board of Directors of GreenField Ethanol, Inc. He is a former Chairman of the Board of the Corn Refiners Association. Mr. Fortnum holds a Bachelor degree in economics from the University of Toronto and completed the Senior Business Administration Course offered by McGill University.

 

 

 

 

 

Diane J. Frisch

 

59

 

Senior Vice President, Human Resources since October 1, 2010. Ms. Frisch previously served as Vice President, Human Resources, from May 1, 2010 to September 30, 2010. Prior to that, Ms. Frisch served as Vice President of Human Resources and Communications for the Food Americas and Global Pharmaceutical Packaging businesses of Rio Tinto’s Alcan Packaging, a multinational company engaged in flexible and specialty packaging, from January 2004 to March 30, 2010. Prior to being acquired by Alcan Packaging, Ms. Frisch served as Vice President of Human Resources for the flexible packaging business of Pechiney, S.A., an aluminum and packaging company with headquarters in Paris and Chicago, from January 2001 to January 2004. Previously, she served as Vice President of Human

 

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Resources for Culligan International Company and Vice President and Director of Human Resources for Alumax Mill Products, Inc., a division of Alumax Inc. Ms. Frisch holds a Bachelor of Arts degree in psychology from Ithaca College, Ithaca, NY, and a Master of Science degree in industrial relations from the University of Wisconsin in Madison.

 

 

 

 

 

Matthew R. Galvanoni

 

41

 

Vice President and Corporate Controller since August 15, 2012. Mr. Galvanoni previously served as Vice President, Corporate Accounting from June 18, 2012, when he joined Ingredion, to August 14, 2012. Mr. Galvanoni was previously employed by Exelon Corporation for 10 years. He served as Principal Accounting Officer of Exelon Generation and Vice President and Assistant Corporate Controller of Exelon Corporation from July 2009 until the merger of Exelon Corporation with Constellation Energy Group, Inc. in March 2012, at which time, Mr. Galvanoni became the Vice President, Financial Systems Integration until May 2012. Mr. Galvanoni previously served as Vice President and Controller of Commonwealth Edison Company and PECO Energy Company from January 2007 to July 2009. He served in various roles at the Director level of the Controllership organization of Exelon Corporation from November 2002 to December 2006. Mr. Galvanoni holds a Bachelor of Science degree in accounting from the University of Illinois, Urbana-Champaign and a Master of Business Administration degree from Northwestern University. He is a certified public accountant in the State of Illinois.

 

 

 

 

 

Jorgen Kokke

 

45

 

Vice President and General Manager, Asia Pacific since January 6, 2014. Mr. Kokke previously served as Vice President and General Manager, EMEA since joining National Starch on March 1, 2009. Prior to that he served as a Vice President with responsibility for the global PURAC Food and Nutrition business, at CSM NV, a supplier of bakery products. Mr. Kokke holds a Master degree in economics from the University of Amsterdam in the Netherlands.

 

 

 

 

 

John F. Saucier

 

60

 

Senior Vice President, Corporate Strategy and Global Business Development since October 1, 2010. Mr. Saucier previously served as Vice President and President Asia/Africa Division and Global Business Development from November 2007 to September 30, 2010. Mr. Saucier previously served as Vice President, Global Business and Product Development, Sales and Marketing from April 2006 to November 2007. Prior to that, Mr. Saucier was President, Integrated Nylon Division of Solutia Inc., a specialty chemical

 

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manufacturer from May 2004 to March 2005, and Vice President of Solutia and General Manager of its Integrated Nylon Division from September 2001 to May 2004. Solutia Inc. and 14 of its US subsidiaries filed voluntary petitions under the bankruptcy laws in December 2003. Mr. Saucier holds Bachelor and Master degrees in mechanical engineering from the University of Missouri and a Master degree in Business Administration from Washington University in St. Louis.

 

 

 

 

 

Robert J. Stefansic

 

52

 

Senior Vice President, Operational Excellence and Environmental, Health, Safety and Sustainability since January 1, 2014. Prior to that, Mr. Stefansic served as Vice President, Operational Excellence and Environmental, Health, Safety and Sustainability from August 1, 2011 to December 31, 2013. He previously served as Vice President, Global Manufacturing Network Optimization and Environmental, Health, Safety and Sustainability of National Starch, from November 1, 2010 to July 31, 2011. Prior to that, he served as Vice President, Global Operations of National Starch from November 1, 2006 to October 31, 2010.  Prior to that, he served as Vice President, North America Manufacturing of National Starch from December 13, 2004 to October 31, 2006.  Prior to joining National Starch he held positions of increasing responsibility with The Valspar Corporation, General Chemical Corp. and Allied Signal Corporation. Mr. Stefansic holds a Bachelor degree in chemical engineering and a Master degree in business administration from the University of South Carolina.

 

 

 

 

 

James P. Zallie

 

52

 

Executive Vice President, Global Specialties and President North America and EMEA since January 6, 2014. Prior to that Mr. Zallie served as Executive Vice President, Global Specialties and President, EMEA and Asia-Pacific from February 1, 2012 to January 5, 2014. Mr. Zallie previously served as Executive Vice President and President, Global Ingredient Solutions from October 1, 2010 to January 31, 2012. Mr. Zallie previously served as President and Chief Executive Officer of the National Starch business from January 2007 to September 30, 2010. Mr. Zallie worked for National Starch for more than 27 years in various positions of increasing responsibility, first in technical, then marketing and then international business management positions. He holds Masters degrees in food science and business administration from Rutgers University and a Bachelor of Science degree in food science from Pennsylvania State University.

 

ITEM 1A.  RISK FACTORS

 

Our business and assets are subject to varying degrees of risk and uncertainty. The following are factors that we believe could cause our actual results to differ materially from expected and historical results. Additional risks that are currently unknown to us may also impair our business or adversely affect our financial condition or results of operations. In addition, forward-looking statements within the meaning of the federal securities laws that are contained in this Form 10-K or in our other filings or statements may be subject to the risks described below as well as other risks and uncertainties. Please read the cautionary notice regarding forward-looking statements in Item 7 below.

 

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Current economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers and others with which we do business to suffer financial hardship, all of which could adversely impact our business, results of operations, financial condition and cash flows.

 

Economic conditions in the US, the European Union, South America and many other countries and regions in which we do business have experienced various levels of weakness over the last few years, and may remain challenging for the foreseeable future.  General business and economic conditions that could affect us include the strength of the economies in which we operate, unemployment, inflation and fluctuations in debt markets.  While currently these conditions have not impaired our ability to access credit markets and finance our operations, there can be no assurance that there will not be a further deterioration in the financial markets.

 

There could be a number of other effects from these economic developments on our business, including reduced consumer demand for products; pressure to extend our customers’ payment terms; insolvency of our customers, resulting in increased provisions for credit losses; decreased customer demand, including order delays or cancellations, and counterparty failures negatively impacting our operations.

 

In connection with our defined benefit pension plans, adverse changes in investment returns earned on pension assets and discount rates used to calculate pension and related liabilities or changes in required pension funding levels may have an unfavorable impact on future pension expense and cash flow.

 

In addition, the volatile worldwide economic conditions and market instability may make it difficult for us, our customers and our suppliers to accurately forecast future product demand trends, which could cause us to produce excess products that can increase our inventory carrying costs.  Alternatively, this forecasting difficulty could cause a shortage of products that could result in an inability to satisfy demand for our products.

 

We operate a multinational business subject to the economic, political and other risks inherent in operating in foreign countries and with foreign currencies.

 

We have operated in foreign countries and with foreign currencies for many years.  Our results are subject to foreign currency exchange fluctuations.  Our operations are subject to political, economic and other risks.  There has been and continues to be significant political uncertainty in some countries in which we operate.  Economic changes, terrorist activity and political unrest may result in business interruption or decreased demand for our products.  Protectionist trade measures and import and export licensing requirements could also adversely affect our results of operations.  Our success will depend in part on our ability to manage continued global political and/or economic uncertainty.

 

We primarily sell world commodities.  Historically, local prices have adjusted relatively quickly to offset the effect of local currency devaluations, although we cannot guarantee this in the future.  Due to recent pricing controls on many consumer products instituted by the Argentina government, we expect that it will take longer than in the past to achieve pricing improvement in that country.  We may hedge transactions that are denominated in a currency other than the currency of the operating unit entering into the underlying transaction.  We are subject to the risks normally attendant to such hedging activities.

 

Raw material and energy price fluctuations, and supply interruptions and shortages could adversely affect our results of operations.

 

Our finished products are made primarily from corn. Purchased corn and other raw material costs account for between 40 percent and 65 percent of finished product costs.  Some of our products are based upon specific varieties of corn that are produced in significantly less volumes than yellow dent corn.  These specialty grains are higher-cost due to their more limited supply and require planning cycles of up to three years in order for us to receive our desired amount of specialty corn.  Also, we utilize tapioca in the manufacturing of starch products in Thailand.  If our raw materials are not available in sufficient quantities or quality, our results of operations could be negatively impacted.

 

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Energy costs represent approximately 10 percent of our finished product costs. We use energy primarily to create steam in our production process and to dry product.  We consume coal, natural gas, electricity, wood and fuel oil to generate energy.  In Pakistan, the overall economy has been slowed by severe energy shortages which both negatively impact our ability to produce sweeteners and starches, and also negatively impacts the demand from our customers due to their inability to produce their end products because of the shortage of reliable energy.

 

The market prices for our raw materials may vary considerably depending on supply and demand, world economies and other factors.  We purchase these commodities based on our anticipated usage and future outlook for these costs.  We cannot assure that we will be able to purchase these commodities at prices that we can adequately pass on to customers to sustain or increase profitability.

 

In North America, we sell a large portion of our finished products at firm prices established in supply contracts typically lasting for periods of up to one year.  In order to minimize the effect of volatility in the cost of corn related to these firm-priced supply contracts, we enter into corn futures and options contracts, or take other hedging positions in the corn futures market.  We are unable to directly hedge price risk related to co-product sales; however, we enter into hedges of soybean oil (a competing product to our animal feed and corn oil) in order to mitigate the price risk of animal feed and corn oil sales.  These derivative contracts typically mature within one year.  At expiration, we settle the derivative contracts at a net amount equal to the difference between the then-current price of corn (or soybean oil) and the derivative contract price.  These hedging instruments are subject to fluctuations in value; however, changes in the value of the underlying exposures we are hedging generally offset such fluctuations.  The fluctuations in the fair value of these hedging instruments may affect the cash flow of the Company.  We fund any unrealized losses or receive cash for any unrealized gains on a daily basis.  While the corn futures contracts or hedging positions are intended to minimize the effect of volatility of corn costs on operating profits, the hedging activity can result in losses, some of which may be material.  Outside of North America, sales of finished products under long-term, firm-priced supply contracts are not material.  We also use over-the-counter natural gas swaps to hedge portions of our natural gas costs, primarily in our North American operations.

 

Due to market volatility, we cannot assure that we can adequately pass potential increases in the cost of corn and other raw materials on to customers through product price increases or purchase quantities of corn and other raw materials at prices sufficient to sustain or increase our profitability.

 

Our corn and raw material costs account for 40 percent to 65 percent of our product costs.  The price and availability of corn and other raw materials is influenced by economic and industry conditions, including supply and demand factors such as crop disease and severe weather conditions such as drought, floods or frost that are difficult to anticipate and which we cannot control.  There is also a demand for corn in the US to produce ethanol which has been significantly impacted by US governmental policies designed to encourage the production of ethanol.

 

Our profitability may be affected by other factors beyond our control.

 

Our operating income and ability to increase profitability depend to a large extent upon our ability to price finished products at a level that will cover manufacturing and raw material costs and provide an acceptable profit margin. Our ability to maintain appropriate price levels is determined by a number of factors largely beyond our control, such as aggregate industry supply and market demand, which may vary from time to time, and the economic conditions of the geographic regions where we conduct our operations.

 

We operate in a highly competitive environment and it may be difficult to preserve operating margins and maintain market share.

 

We operate in a highly competitive environment.  Many of our products compete with virtually identical or similar products manufactured by other companies in the starch and sweetener industry.  In the United States, there are competitors, several of which are divisions of larger enterprises that have greater financial resources than we do. Some of these competitors, unlike us, have vertically integrated their corn refining and other operations.  Many of our products also compete with products made from raw materials other than corn.  Fluctuation in prices of these competing products

 

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may affect prices of, and profits derived from, our products.  In addition, government programs supporting sugar prices indirectly impact the price of corn sweeteners, especially HFCS.  Competition in markets in which we compete is largely based on price, quality and product availability.

 

Changes in consumer preferences and perceptions may lessen the demand for our products, which could reduce our sales and profitability and harm our business.

 

Food products are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends. For instance, changes in prevailing health or dietary preferences causing consumers to avoid food products containing sweetener products, including HFCS, in favor of foods that are perceived as being more healthy, could reduce our sales and profitability, and such a reduction could be material. Increasing concern among consumers, public health professionals and government agencies about the potential health concerns associated with obesity and inactive lifestyles represent a significant challenge to some of our customers, including those engaged in the food and soft drink industries.

 

The uncertainty of acceptance of products developed through biotechnology could affect our profitability.

 

The commercial success of agricultural products developed through biotechnology, including genetically modified corn, depends in part on public acceptance of their development, cultivation, distribution and consumption. Public attitudes can be influenced by claims that genetically modified products are unsafe for consumption or that they pose unknown risks to the environment even if such claims are not based on scientific studies. These public attitudes can influence regulatory and legislative decisions about biotechnology. The sale of the Company’s products which may contain genetically modified corn could be delayed or impaired because of adverse public perception regarding the safety of the Company’s products and the potential effects of these products on animals, human health and the environment.

 

Our information technology systems, processes, and sites may suffer interruptions or failures which may affect our ability to conduct our business.

 

Our information technology systems, some of which are dependent on services provided by third parties, provide critical data connectivity, information and services for internal and external users.  These interactions include, but are not limited to, ordering and managing materials from suppliers, converting raw materials to finished products, inventory management, shipping products to customers, processing transactions, summarizing and reporting results of operations, human resources benefits and payroll management, complying with regulatory, legal or tax requirements, and other processes necessary to manage the business.  We have put in place security measures to protect ourselves against cyber-based attacks and disaster recovery plans for our critical systems.  However, if our information technology systems are breached, damaged, or cease to function properly due to any number of causes, such as catastrophic events, power outages, security breaches, or cyber-based attacks, and our disaster recovery plans do not effectively mitigate on a timely basis, we may encounter disruptions that could interrupt our ability to manage our operations and suffer damage to our reputation, which may adversely impact our revenues, operating results and financial condition.

 

Our profitability could be negatively impacted if we fail to maintain satisfactory labor relations.

 

Approximately 35 percent of our US and 47 percent of our non-US employees are members of unions.  Strikes, lockouts or other work stoppages or slow downs involving our unionized employees could have a material adverse effect on us.

 

Our reliance on certain industries for a significant portion of our sales could have a material adverse effect on our business.

 

Approximately 50 percent of our 2013 sales were made to companies engaged in the food industry and approximately 14 percent were made to companies in the beverage industry.  Additionally, sales to the animal nutrition market, the paper and corrugating industry, and the brewing industry represented approximately 12 percent, 9 percent and 8 percent of our 2013 net sales, respectively.  If our food customers, beverage customers, brewing industry

 

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customers, paper and corrugating customers or animal feed customers were to substantially decrease their purchases, our business might be materially adversely affected.

 

Natural disasters, war, acts and threats of terrorism, pandemic and other significant events could negatively impact our business.

 

If the economies of any countries where we sell or manufacture products are affected by natural disasters; such as earthquakes, floods or severe weather; war, acts of war or terrorism; or the outbreak of a pandemic such as Severe Acute Respiratory Syndrome (“SARS”) or the Avian Flu; it could result in asset write-offs, decreased sales and overall reduced cash flows.

 

Government policies and regulations in general, and specifically affecting agriculture-related businesses, could adversely affect our operating results.

 

Our operating results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, and other activities of United States and foreign governments, agencies, and similar organizations. These conditions include but are not limited to changes in a country’s or region’s economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights, changes in the regulatory or legal environment, restrictions on currency exchange activities, currency exchange rate fluctuations, burdensome taxes and tariffs, and other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities, and war, could limit our ability to transact business in these markets and could adversely affect our revenues and operating results.

 

Due to cross-border disputes, our operations could be adversely affected by actions taken by the governments of countries where we conduct business.

 

The recognition of impairment charges on goodwill or long-lived assets could adversely impact our future financial position and results of operations.

 

We perform an annual impairment assessment for goodwill and our indefinite-lived intangible assets, and as necessary, for other long-lived assets.  If the results of such assessments were to show that the fair value of these assets were less than the carrying values, we could be required to recognize a charge for impairment of goodwill and/or long-lived assets and the amount of the impairment charge could be material.  Our annual impairment assessment as of October 1, 2013 did not result in any additional impairment charges for the year.

 

Even though it was determined that there was no additional long-lived asset impairment as of October 1, 2013, the future occurrence of a potential indicator of impairment, such as a significant adverse change in the business climate that would require a change in our assumptions or strategic decisions made in response to economic or competitive conditions, could require us to perform an assessment prior to the next required assessment date of October 1, 2014.

 

Changes in our tax rates or exposure to additional income tax liabilities could impact our profitability.

 

We are subject to income taxes in the United States and in various other foreign jurisdictions.  Our effective tax rates could be adversely affected by changes in the mix of earnings by jurisdiction, changes in tax laws or tax rates including potential tax reform in the US to broaden the tax base and reduce deductions or credits, changes in the valuation of deferred tax assets and liabilities, and material adjustments from tax audits.

 

In particular, the carrying value of deferred tax assets, which are predominantly in the US, United Kingdom, Mexico and Korea, is dependent upon our ability to generate future taxable income in these jurisdictions.  In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions and a material assessment by a governing tax authority could affect our profitability.

 

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Operating difficulties at our manufacturing plants could adversely affect our operating results.

 

Producing starches and sweeteners through corn refining is a capital intensive industry. We have 36 plants and have preventive maintenance and de-bottlenecking programs designed to maintain and improve grind capacity and facility reliability. If we encounter operating difficulties at a plant for an extended period of time or start-up problems with any capital improvement projects, we may not be able to meet a portion of sales order commitments and could incur significantly higher operating expenses, both of which could adversely affect our operating results.  We also use boilers to generate steam required in our manufacturing processes. An event that impaired the operation of a boiler for an extended period of time could have a significant adverse effect on the operations of any plant where such event occurred.

 

Also, we are subject to risks related to such matters as product quality or contamination; compliance with environmental, health and safety regulations; and customer product liability claims.  The liability which could result from these risks may not always be covered by, or could exceed the limits of the insurance coverage related to product liability and food safety matters that we maintain.  In addition, negative publicity caused by product liability and food safety matters may damage our reputation.  The occurrence of any of the matters described above could adversely affect our revenues and operating results.

 

We may not have access to the funds required for future growth and expansion.

 

We may need additional funds to grow and expand our operations. We expect to fund our capital expenditures from operating cash flow to the extent we are able to do so.  If our operating cash flow is insufficient to fund our capital expenditures, we may either reduce our capital expenditures or utilize our general credit facilities.  For further strategic growth through mergers or acquisitions, we may also seek to generate additional liquidity through the sale of debt or equity securities in private or public markets or through the sale of non-productive assets.  We cannot provide any assurance that our cash flows from operations will be sufficient to fund anticipated capital expenditures or that we will be able to obtain additional funds from financial markets or from the sale of assets at terms favorable to us.  If we are unable to generate sufficient cash flows or raise sufficient additional funds to cover our capital expenditures or other strategic growth opportunities, we may not be able to achieve our desired operating efficiencies and expansion plans, which may adversely impact our competitiveness and, therefore, our results of operations.

 

We may not successfully identify and complete acquisitions or strategic alliances on favorable terms or achieve anticipated synergies relating to any acquisitions or alliances, and such acquisitions could result in unforeseen operating difficulties and expenditures and require significant management resources.

 

We regularly review potential acquisitions of complementary businesses, technologies, services or products, as well as potential strategic alliances. We may be unable to find suitable acquisition candidates or appropriate partners with which to form partnerships or strategic alliances. Even if we identify appropriate acquisition or alliance candidates, we may be unable to complete such acquisitions or alliances on favorable terms, if at all. In addition, the process of integrating an acquired business, technology, service or product into our existing business and operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may require significant management resources that otherwise would be available for ongoing development of our business. Moreover, we may not realize the anticipated benefits of any acquisition or strategic alliance, and such transactions may not generate anticipated financial results. Future acquisitions could also require us to issue equity securities, incur debt, assume contingent liabilities or amortize expenses related to intangible assets, any of which could harm our business.

 

An inability to contain costs could adversely affect our future profitability and growth.

 

Our future profitability and growth depends on our ability to contain operating costs and per-unit product costs and to maintain and/or implement effective cost control programs, while at the same time maintaining competitive pricing and superior quality products, customer service and support. Our ability to maintain a competitive cost structure depends on continued containment of manufacturing, delivery and administrative costs, as well as the implementation of cost-effective purchasing programs for raw materials, energy and related manufacturing requirements.

 

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If we are unable to contain our operating costs and maintain the productivity and reliability of our production facilities, our profitability and growth could be adversely affected.

 

Volatility in the stock market, fluctuations in quarterly operating results and other factors could adversely affect the market price of our common stock.

 

The market price for our common stock may be significantly affected by factors such as our announcement of new products or services or such announcements by our competitors; technological innovation by us, our competitors or other vendors; quarterly variations in our operating results or the operating results of our competitors; general conditions in our or our customers’ markets; and changes in the earnings estimates by analysts or reported results that vary materially from such estimates. In addition, the stock market has experienced significant price fluctuations that have affected the market prices of equity securities of many companies that have been unrelated to the operating performance of any individual company.

 

No assurance can be given that we will continue to pay dividends.

 

The payment of dividends is at the discretion of our Board of Directors and will be subject to our financial results and the availability of surplus funds to pay dividends.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None

 

ITEM 2.  PROPERTIES

 

We operate, directly and through our consolidated subsidiaries, 36 manufacturing facilities, all of which are owned. In addition, we lease our corporate headquarters in Westchester, Illinois and our research and development facility in Bridgewater, New Jersey. The following list details the locations of our manufacturing facilities within each of our four reportable business segments:

 

North America

 

South America

 

Asia Pacific

 

EMEA

 

 

 

 

 

 

 

Cardinal, Ontario, Canada

 

Baradero, Argentina

 

Lane Cove, Australia

 

Cornwala, Pakistan

London, Ontario, Canada

 

Chacabuco, Argentina

 

Shanghai, China

 

Faisalabad, Pakistan

Port Colborne, Ontario, Canada

 

Balsa Nova, Brazil

 

Ichon, South Korea

 

Mehran, Pakistan

San Juan del Rio, Queretaro, Mexico

 

Cabo, Brazil

 

Inchon, South Korea

 

Hamburg, Germany

Guadalajara, Jalisco, Mexico

 

Conchal, Brazil

 

Ban Kao Dien, Thailand

 

Goole, United Kingdom

Mexico City, Edo, Mexico

 

Mogi-Guacu, Brazil

 

Kalasin, Thailand

 

 

Stockton, California, U.S.

 

Rio de Janeiro, Brazil

 

Sikhiu, Thailand

 

 

Bedford Park, Illinois, U.S.

 

Trombudo, Brazil

 

 

 

 

Mapleton, Illinois, U.S.

 

Barranquilla, Colombia

 

 

 

 

Indianapolis, Indiana, U.S.

 

Cali, Colombia

 

 

 

 

North Kansas City, Missouri, U.S.

 

Lima, Peru

 

 

 

 

Winston-Salem, North Carolina, U.S.

 

 

 

 

 

 

Charleston, South Carolina, U.S.

 

 

 

 

 

 

 

We believe our manufacturing facilities are sufficient to meet our current production needs. We have preventive maintenance and de-bottlenecking programs designed to further improve grind capacity and facility reliability.

 

We have electricity co-generation facilities at all of our US and Canadian plants with the exception of

 

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Indianapolis, North Kansas City, Stockton, Charleston and Mapleton, as well as at our plants in San Juan del Rio, Mexico; Mexico City, Mexico; Baradero, Argentina; and Balsa Nova and Mogi-Guacu, Brazil, that provide electricity at a lower cost than is available from third parties. We generally own and operate these co-generation facilities, except for the facilities at our Cardinal, Ontario; and Balsa Nova and Mogi-Guacu, Brazil locations, which are owned by, and operated pursuant to co-generation agreements with third parties.

 

In recent years, we have made significant capital expenditures to update, expand and improve our facilities, spending $298 million in 2013.  We believe these capital expenditures will allow us to operate efficient facilities for the foreseeable future.   We currently anticipate that capital expenditures for 2014 will approximate $300 million to $350 million.

 

ITEM 3.  LEGAL PROCEEDINGS

 

As previously reported, on April 22, 2011, Western Sugar and two other sugar companies filed a complaint in the U.S. District Court for the Central District of California against the Corn Refiners Association (“CRA”) and certain of its member companies, including us, alleging false and/or misleading statements relating to high fructose corn syrup in violation of the Lanham Act and California’s unfair competition law.  The complaint seeks injunctive relief and unspecified damages.  On May 23, 2011, the plaintiffs amended the complaint to add additional plaintiffs, among other reasons.

 

On July 1, 2011, the CRA and the member companies in the case filed a motion to dismiss the first amended complaint on multiple grounds.  On October 21, 2011, the U.S. District Court for the Central District of California dismissed all Federal and state claims against us and the other members of the CRA, with leave for the plaintiffs to amend their complaint, and also dismissed all state law claims against the CRA.

 

The state law claims against the CRA were dismissed pursuant to a California law known as the anti-SLAPP (Strategic Lawsuit Against Public Participation) statute, which, according to the court’s opinion, allows early dismissal of meritless first amendment cases aimed at chilling expression through costly, time-consuming litigation.  The court held that the CRA’s statements were protected speech made in a public forum in connection with an issue of public interest (high fructose corn syrup).  Under the anti-SLAPP statute, the CRA is entitled to recover its attorney’s fees and costs from the plaintiffs.

 

On November 18, 2011, the plaintiffs filed a second, amended complaint against certain of the CRA member companies, including us, seeking to reinstate the federal law claims, but not the state law claims, against certain of the CRA member companies, including us.  On December 16, 2011, the CRA member companies filed a motion to dismiss the second amended complaint on multiple grounds. On July 31, 2012, the U.S. District Court for the Central District of California denied the motion to dismiss for all CRA member companies other than Roquette America, Inc.

 

On September 4, 2012, we and the other CRA member companies that remain defendants in the case filed an answer to the plaintiffs’ second, amended complaint that, among other things, added a counterclaim against the Sugar Association.  The counterclaim alleges that the Sugar Association has made false and misleading statements that processed sugar differs from high fructose corn syrup in ways that are beneficial to consumers’ health (i.e., that consumers will be healthier if they consume foods and beverages containing processed sugar instead of high fructose corn syrup).  The counterclaim, which was filed in the U.S. District Court for the Central District of California, seeks injunctive relief and unspecified damages. Although the counterclaim was initially only filed against the Sugar Association, the Company and the other CRA member companies that remain defendants in the Western Sugar case have reserved the right to add other plaintiffs to the counterclaim in the future.

 

On October 29, 2012, the Sugar Association and the other plaintiffs filed a motion to dismiss the counterclaim and certain related portions of the defendants’ answer, each on multiple grounds.  On December 10,

 

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2012, the remaining member companies which are defendants in the case responded to the motion to dismiss the counterclaim.  On January 14, 2013, the plaintiffs filed a reply to the defendants’ response to the motion to dismiss.  On September 16, 2013, the U.S. District Court for the Central District of California denied the motion to dismiss the counterclaim, which entitles the Company and the other CRA member companies to continue to pursue the counterclaim against the Sugar Association and the other plaintiffs.

 

We continue to believe that the second, amended complaint is without merit and intend to vigorously defend this case.  In addition, we intend to vigorously pursue our rights in connection with the counterclaim.

 

We are currently subject to various other claims and suits arising in the ordinary course of business, including certain environmental proceedings and product liability claims.  We do not believe that the results of such legal proceedings, even if unfavorable to us, will be material to us.  There can be no assurance, however, that such claims or suits or those arising in the future, whether taken individually or in the aggregate, will not have a material adverse effect on our financial condition or results of operations.

 

ITEM 4.                             MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5.                     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Shares of our common stock are traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “INGR.”  The number of holders of record of our common stock was 5,428 at January 31, 2014.

 

We have a history of paying quarterly dividends.  The amount and timing of the dividend payment, if any, is based on a number of factors including estimated earnings, financial position and cash flow.  The payment of a dividend is solely at the discretion of our Board of Directors.  Future dividend payments will be subject to our financial results and the availability of funds and statutory surplus to pay dividends.

 

The quarterly high and low sales prices for our common stock and cash dividends declared per common share for 2012 and 2013 are shown below.

 

 

 

1st QTR

 

2nd QTR

 

3rd QTR

 

4th QTR

 

2013

 

 

 

 

 

 

 

 

 

Market prices

 

 

 

 

 

 

 

 

 

High

 

$

72.58

 

$

74.31

 

$

72.19

 

$

70.48

 

Low

 

62.44

 

62.65

 

60.62

 

63.49

 

Per share dividends declared

 

$

0.38

 

$

0.38

 

$

0.38

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

 

 

 

Market prices

 

 

 

 

 

 

 

 

 

High

 

$

58.38

 

$

58.87

 

$

56.57

 

$

66.66

 

Low

 

50.59

 

47.26

 

45.30

 

54.57

 

Per share dividends declared

 

$

0.20

 

$

0.20

 

$

0.26

 

$

0.26

 

 

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Issuer Purchases of Equity Securities:

 

The following table summarizes information with respect to our purchases of our common stock during the fourth quarter of 2013.

 

(shares in thousands)

 

Total
Number
of Shares 
Purchased

 

Average
Price
Paid
per Share

 

Total Number of
Shares Purchased as
part of Publicly
Announced Plans or
Programs

 

Maximum Number
(or Approximate
Dollar Value) of
Shares that may yet
be Purchased Under
the Plans or Programs
at end of period

 

 

 

 

 

 

 

 

 

 

 

Oct. 1 – Oct. 31, 2013

 

 

 

 

2,505 shares

 

Nov. 1 – Nov. 30, 2013

 

2,029

 

68.30

 

2,029

 

476 shares

 

Dec. 1 – Dec. 31, 2013

 

476

 

69.62

 

476

 

4,000 shares*

 

Total

 

2,505

 

68.55

 

2,505

 

 

 

 


*On December 13, 2013, the Board of Directors authorized a new stock repurchase program permitting the Company to purchase up to 4 million of its outstanding common shares through December 12, 2018.  The Company’s previous stock repurchase program permitting the purchase of up to 5 million shares was completed in the fourth quarter upon the repurchase of 2.5 million shares at an average price of $68.55 per share.  As of December 31, 2013, we had not repurchased any shares under the new program, leaving 4 million shares available for repurchase.

 

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ITEM 6.                         SELECTED FINANCIAL DATA

 

Selected financial data is provided below.

 

(in millions, except per share amounts)

 

2013

 

2012

 

2011

 

2010 (a)

 

2009

 

Summary of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

6,328

 

$

6,532

 

$

6,219

 

$

4,367

 

$

3,672

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Ingredion

 

396

 

428

(b)

416

(c)

169

(d)

41

(e)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share of Ingredion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

5.14

 

$

5.59

(b)

$

5.44

(c)

$

2.24

(d)

$

0.55

(e)

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

5.05

 

$

5.47

(b)

$

5.32

(c)

$

2.20

(d)

$

0.54

(e)

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share of Ingredion

 

$

1.56

 

$

0.92

 

$

0.66

 

$

0.56

 

$

0.56

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

1,394

 

$

1,427

 

$

1,176

 

$

881

 

$

450

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment-net

 

2,156

 

2,193

 

2,156

 

2,156

 

1,594

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

5,360

 

5,592

 

5,317

 

5,040

 

2,952

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,717

 

1,724

 

1,801

 

1,681

 

408

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

1,810

 

1,800

 

1,949

 

1,769

 

544

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity (f)

 

$

2,429

 

$

2,459

 

$

2,133

 

$

2,001

 

$

1,704

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares outstanding, year end

 

74.3

 

77.0

 

75.9

 

76.0

 

74.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

194

 

$

211

 

$

211

 

$

155

 

$

130

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

298

 

313

 

263

 

159

 

146

 

 


(a)   Includes National Starch from October 1, 2010 forward.

 

(b)   Includes a $13 million benefit from the reversal of a valuation allowance that had been recorded against net deferred tax assets of our Korean subsidiary ($0.16 per diluted common share), after-tax charges for impaired assets and restructuring costs of $23 million ($0.29 per diluted common share), an after-tax gain from a change in a North American benefit plan of $3 million ($0.04 per diluted common share), after-tax costs of $3 million ($0.03 per diluted common share) relating to the integration of National Starch and an after-tax gain from the sale of land sale of $2 million ($0.02 per diluted common share).  See Notes 3 and 7 of the notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.

 

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(c)   Includes a $58 million NAFTA award ($0.75 per diluted common share) received from the Government of the United Mexican States, an after-tax gain of $18 million ($0.23 per diluted common share) pertaining to a change in a postretirement plan, after-tax charges of $7 million for restructuring costs ($0.08 per diluted common share) and after-tax costs of $21 million ($0.26 per diluted common share) relating to the integration of National Starch.   See Notes 3, 8 and 11 of the notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.

 

(d)   Includes $14 million of after-tax charges for bridge loan and other financing costs ($0.18 per diluted common share), after-tax costs related to the National Starch acquisition of $26 million ($0.34 per diluted common share), after-tax charges of $22 million ($0.29 per diluted common share) for impaired assets and other costs primarily associated with our operations in Chile and after-tax charges of $18 million ($0.23 per diluted common share) relating to the sale of National Starch inventory that was adjusted to fair value at the acquisition date in accordance with business combination accounting rules.

 

(e)   Includes after-tax charges for impaired assets and restructuring costs of $110 million, or $1.47 per diluted common share.

 

(f)    Includes non-controlling interests.

 

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ITEM 7.                         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

We are a major supplier of high-quality food and industrial ingredients to customers around the world.  We have 36 manufacturing plants located throughout North America, South America, Asia Pacific and Europe, the Middle East and Africa (“EMEA”), and we manage and operate our businesses at a regional level.  We believe this approach provides us with a unique understanding of the cultures and product requirements in each of the geographic markets in which we operate, bringing added value to our customers.  Our ingredients are used by customers in the food, beverage, animal feed, paper and corrugating, and brewing industries, among others.

 

Our Strategic Blueprint continues to guide our decision making and strategic choices with an emphasis on value-added ingredients for our customers. The foundation of our Strategic Blueprint is operational excellence, which includes our focus on safety, quality and continuous improvement.  We see growth opportunities in three areas.  First is organic growth as we expand our current business.  Second, we are focused on innovation and expect to grow through the development of new, on-trend products.  Finally, we look for growth from geographic expansion as we extend our reach to new locations.  The ultimate goal of these strategies and actions is to deliver increased shareholder value.

 

Critical success factors in our business include managing our significant manufacturing costs, including corn, other raw materials and utilities.  In addition, due to our global operations we are exposed to fluctuations in foreign currency exchange rates.  We use derivative financial instruments, when appropriate, for the purpose of minimizing the risks and/or costs associated with fluctuations in certain raw material and energy costs, foreign exchange rates and interest rates.  Also, the capital intensive nature of our business requires that we generate significant cash flow over time in order to selectively reinvest in our operations and grow organically, as well as through strategic acquisitions and alliances.  We utilize certain key financial metrics relating to working capital, debt and return on capital employed to monitor our progress toward achieving our strategic business objectives (see section entitled “Key Financial Performance Metrics”).

 

Net sales, operating income, net income and diluted earnings per common share for 2013 decreased from our record levels of 2012.  The decreased earnings were driven principally by poor operating results in our South America business.  Our inability to increase selling prices to a level sufficient to recover higher costs, primarily in Argentina, and the reduced absorption of fixed manufacturing costs as a result of lower sales volumes due to soft demand from a weaker economy, drove the earnings decline in South America.  We anticipate that our business in the Southern Cone of South America will continue to be challenged with high production costs, the devaluation of the Argentine peso, product pricing limitations and volume pressures in 2014.  We expect that it will continue to take longer to achieve pricing improvement in the Southern Cone of South America to recapture the unfavorable impact of the devaluation of the Argentine Peso, compared to our historical experience, due to price controls on many consumer products instituted by the government of Argentina.  In North America, our largest segment, we performed well as operating income declined only 2 percent from our record performance of 2012 despite the challenges created by historically high corn prices driven by the worst drought in decades, low sugar prices and soft consumer volumes.  Asia Pacific delivered another year of volume and operating income growth; while EMEA continued to show volume strength, although operating income declined slightly due to unfavorable currency translation and higher energy costs in Pakistan.

 

We generated good operating cash flow that we used to invest in our business and to repurchase 3.4 million of our common shares.  We also increased the cash dividend on our common stock by over 60 percent in 2013.  Our balance sheet is strong and positions us well for future strategic initiatives.

 

Looking ahead, we anticipate that our operating income will grow in 2014 compared to 2013.  In North America, although we anticipate net sales to decline as we pass along lower corn prices to our customers, we expect our operating income to slightly improve based on the anticipated mix of products to be sold.  South American net sales and operating income are expected to increase as volumes improve in the segment; however, we are cautious of potential continued difficult political and economic conditions in Argentina.  Net sales and operating income are anticipated to improve in

 

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2014 in both our Asia Pacific and EMEA segments with increases in net sales reflecting anticipated volume growth and a more favorable mix of product sales.

 

We currently expect that our available cash balances, future cash flow from operations and borrowing capacity under our credit facilities will provide us with sufficient liquidity to fund our anticipated capital expenditures, dividends and other investing and/or financing activities for the foreseeable future.

 

RESULTS OF OPERATIONS

 

We have significant operations in North America, South America, Asia Pacific and EMEA.  For most of our foreign subsidiaries, the local foreign currency is the functional currency.  Accordingly, revenues and expenses denominated in the functional currencies of these subsidiaries are translated into US dollars (“USD”) at the applicable average exchange rates for the period.  Fluctuations in foreign currency exchange rates affect the US dollar amounts of our foreign subsidiaries’ revenues and expenses.  The impact of foreign currency exchange rate changes, where significant, is provided below.

 

2013 Compared to 2012

 

Net Income attributable to Ingredion.  Net income attributable to Ingredion for 2013 decreased to $396 million, or $5.05 per diluted common share, from 2012 net income of $428 million, or $5.47 per diluted common share.  Our results for 2012 included after-tax charges of $16 million ($0.20 per diluted common share) for impaired assets and restructuring costs in Kenya, China and Colombia (see Note 3 of the notes to the consolidated financial statements for additional information), after-tax restructuring charges of $7 million ($0.09 per diluted common share) relating to our manufacturing optimization plan in North America, and after-tax costs of $3 million ($0.03 per diluted common share) associated with our integration of National Starch.  Additionally, our 2012 results included the reversal of a $13 million valuation allowance that had been recorded against net deferred tax assets of our Korean subsidiary ($0.16 per diluted common share), an after-tax gain from a change in a benefit plan of $3 million ($0.04 per diluted common share) and an after-tax gain from the sale of land of $2 million ($0.02 per diluted common share).

 

Without the impairment/restructuring charges, the reversal of the Korean deferred tax asset valuation allowance, the gain from the benefit plan change, the gain from the land sale and the integration costs in 2012, net income and diluted earnings per common share for 2013 would have declined 9 percent from 2012.  This decline in net income primarily reflects lower operating income driven principally by significantly reduced operating income in South America.

 

Net Sales.  Net sales for 2013 decreased to $6.33 billion from $6.53 billion in 2012, primarily reflecting reduced sales in South America and North America.

 

A summary of net sales by reportable business segment is shown below:

 

(in millions)

 

2013

 

2012

 

Increase 
(Decrease)

 

% Change

 

North America

 

$

3,647

 

$

3,741

 

$

(94

)

(3

)%

South America

 

1,334

 

1,462

 

(128

)

(9

)%

Asia Pacific

 

805

 

816

 

(11

)

(1

)%

EMEA

 

542

 

513

 

29

 

6

%

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,328

 

$

6,532

 

$

(204

)

(3

)%

 

The decrease in net sales primarily reflects a 3 percent volume reduction and unfavorable currency translation of 3 percent attributable to weaker foreign currencies relative to the US dollar, which more than offset improved price/product mix of 3 percent.

 

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Net sales in North America decreased 3 percent, as a 4 percent volume decline and slightly unfavorable currency translation attributable to a weaker Canadian dollar, more than offset improved price/product mix of 2 percent.  Increased selling prices helped to offset higher corn costs.  Net sales in South America decreased 9 percent, as a 10 percent decline attributable to weaker foreign currencies and a 2 percent volume reduction, more than offset a 3 percent price/product mix improvement.  The volume reduction primarily reflects weaker economic conditions, particularly in the Southern Cone of South America and in Brazil, and reduced sales to the brewing industry where excess industry capacity resulted in weaker brewery demand for high maltose in Brazil.  Asia Pacific net sales declined 1 percent, as a volume decline of 2 percent and slightly unfavorable currency translation effects more than offset a 1 percent price/product mix improvement.  The volume reduction reflects the effect of the fourth quarter 2012 sale of our investment in our Chinese non-wholly-owned consolidated subsidiary, Shouguang Golden Far East Modified Starch Co., Ltd. (“GFEMS”).  Without net sales of $23 million from GFEMS in 2012, Asia Pacific net sales for 2013 would have increased 2 percent and volume would have grown 1 percent from a year ago.  EMEA net sales grew 6 percent reflecting price/product mix improvement of 8 percent and 1 percent volume growth, which more than offset unfavorable currency translation of 3 percent.  Without an $11 million sales reduction attributable to the closure of our plant in Kenya, EMEA net sales for 2013 would have increased approximately 8 percent and volume would have grown approximately 3 percent from 2012.

 

Cost of Sales.  Cost of sales for 2013 decreased 2 percent to $5.20 billion from $5.29 billion in 2012.  Higher raw material costs were more than offset by reduced volume, the effects of currency translation and the impacts of continued cost savings focus.  Pricing actions by us limited the unfavorable impact of higher raw material costs on our operating income.  Currency translation caused cost of sales for 2013 to decrease approximately 3 percent from 2012, reflecting the impact of weaker foreign currencies, particularly in South America.  Gross corn costs per ton for 2013 increased approximately 1 percent from 2012, driven by higher market prices for corn.  Additionally, energy costs increased approximately 2 percent from 2012; primarily reflecting higher costs in Korea and Pakistan.  Our gross profit margin for 2013 was 18 percent, compared to 19 percent in 2012, primarily reflecting lower gross profits in South America.

 

Selling, General and Administrative Expenses.  Selling, general and administrative (“SG&A”) expenses for 2013 declined to $534 million from $556 million in 2012.  The decrease was driven principally by foreign currency weakness and cost savings initiatives.  Currency translation caused SG&A expenses for 2013 to decrease approximately 3 percent from 2012.  SG&A expenses represented approximately 8 percent of net sales in 2013, consistent with 2012.

 

Other Income-net.  Other income-net of $16 million for 2013 decreased from other income-net of $22 million in 2012.  This decrease primarily reflects the effects of a $5 million gain from a change in a North America benefit plan and a $2 million gain from a land sale, both of which were recorded in the fourth quarter of 2012.

 

Operating Income.  A summary of operating income is shown below:

 

(in millions)

 

2013

 

2012

 

Favorable
(Unfavorable)
Variance

 

Favorable
(Unfavorable)
% Change

 

North America

 

$

401

 

$

408

 

$

(7

)

(2

)%

South America

 

116

 

198

 

(82

)

(41

)%

Asia Pacific

 

97

 

95

 

2

 

2

%

EMEA

 

74

 

78

 

(4

)

(6

)%

Corporate expenses

 

(75

)

(78

)

3

 

4

%

Restructuring/impairment charges

 

 

(36

)

36

 

nm

 

Gain from change in benefit plans

 

 

5

 

(5

)

nm

 

Integration costs

 

 

(4

)

4

 

nm

 

Gain from sale of land

 

 

2

 

(2

)

nm

 

Operating income

 

$

613

 

$

668

 

$

(55

)

(8

)%

 

Operating income for 2013 declined to $613 million from $668 million in 2012.  Operating income for 2012 included $20 million of charges for impaired assets and restructuring costs in Kenya, $11 million of restructuring charges to reduce the carrying value of certain equipment associated with our manufacturing optimization plan in North America,

 

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$5 million of charges for impaired assets in China and Colombia, and $4 million of costs pertaining to the integration of National Starch.  Additionally, operating income for 2012 included the $5 million gain from the benefit plan change in North America and a $2 million gain from the sale of land.  Without the impairment/restructuring charges, integration costs, the gain from the benefit plan change, and the gain from the land sale, operating income for 2013 would have decreased 13 percent, primarily reflecting reduced operating income in South America.  Unfavorable currency translation associated with weaker foreign currencies caused operating income to decline by approximately $21 million from 2012.

 

North America operating income decreased 2 percent to $401 million from $408 million in 2012.  Lower volumes due to reduced customer demand drove the operating income decline.  Improved product selling prices and manufacturing cost saving initiatives limited the unfavorable impact of the reduced sales volume.  Currency translation associated with a weaker Canadian dollar caused operating income to decrease by approximately $3 million in North America.  South America operating income decreased 41 percent to $116 million from $198 million in 2012.  The decrease was driven by significantly weaker results in the Southern Cone of South America and in Brazil.  Our inability to increase selling prices to a level sufficient to recover higher corn, energy and labor costs, primarily in Argentina, and the reduced absorption of fixed manufacturing costs as a result of lower sales volumes due to soft demand from a weaker economy, drove the earnings decline.  Translation effects associated with weaker South American currencies (particularly the Argentine Peso and Brazilian Real) caused operating income to decrease by approximately $14 million.  We anticipate that our business in South America will continue to be challenged with high production costs, local currency devaluation, product pricing limitations and volume pressures in 2014.  Asia Pacific operating income rose 2 percent to $97 million from $95 million in 2012.  This increase primarily reflects organic volume growth and slightly higher product selling prices, which more than offset higher local production costs and the impact of weaker foreign currencies.  Unfavorable translation effects associated with weaker foreign currencies caused Asia Pacific operating income to decrease by approximately $1 million.  EMEA operating income decreased 6 percent to $74 million from $78 million in 2012.  The decrease primarily reflects the impacts of weaker foreign currencies and higher local production and energy costs, which more than offset improved product price/mix and volume growth.  Translation effects associated with weaker foreign currencies (particularly the Pakistan Rupee) caused EMEA operating income to decrease by approximately $3 million.  Energy infrastructure in Pakistan remains problematic and we continue to face challenges resulting from related power shortages and higher energy costs in that country.

 

Financing Costs-net.  Financing costs-net decreased slightly to $66 million in 2013 from $67 million in 2012.  The decrease primarily reflects reduced interest expense driven by lower average borrowings and interest rates and an increase in interest income attributable to our higher cash balances, partially offset by an increase in foreign currency transaction losses.

 

Provision for Income Taxes.  Our effective tax rate was 26.3 percent in 2013, as compared to 27.8 percent in 2012.  Our effective tax rate for 2013 includes approximately $2 million of tax benefits related to the January 2, 2013 enactment of the US American Taxpayer Relief Act of 2012.  The Company also received a favorable tax determination from the Canadian courts during 2013 that resulted in approximately $4 million of tax benefits related to prior years, and an additional $2 million related to the current year.  In addition, the Company recognized approximately $11 million of tax favorability related to net changes in previously unrecognized tax benefits and global provision to return adjustments.  Our effective income tax rate for 2012 includes the effects of the discrete reversal of a $13 million valuation allowance that had been recorded against net deferred tax assets of our Korean subsidiary, the recognition of an income tax benefit of $8 million related to our $20 million restructuring charge in Kenya and the associated tax write-off of the investment.  Additionally, in 2012 we recorded a $4 million pre-tax charge related to the disposition of GFEMS, which is not expected to produce a realizable tax benefit.  Without the impact of the items described above, our effective tax rates for 2013 and 2012 would have been approximately 30 percent in both periods.  See also Note 7 of the notes to the consolidated financial statements.

 

Net Income Attributable to Non-controlling Interests.  Net income attributable to non-controlling interests was $7 million in 2013, up from $6 million in 2012.  The increase reflects the impact of our 2012 sale of GFEMS and improved net income at our non-wholly-owned operation in Pakistan.

 

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Comprehensive Income.  We recorded comprehensive income of $288 million in 2013, as compared with $366 million in 2012.  The decrease in comprehensive income primarily reflects a $125 million unfavorable variance in the cumulative translation adjustment, a $41 million unfavorable variance associated with our cash-flow hedging activity and our lower net income of $31 million, partially offset by a $119 million favorable variance relating mainly to the improved funded status of our pension and postretirement benefit plans.  The unfavorable variance in the cumulative translation adjustment reflects a greater weakening in end of period foreign currencies relative to the US dollar, as compared to a year ago.

 

2012 Compared to 2011

 

Net Income attributable to Ingredion.  Net income attributable to Ingredion for 2012 increased to $428 million, or $5.47 per diluted common share, from 2011 net income of $416 million, or $5.32 per diluted common share.  Our results for 2012 included after-tax charges of $16 million ($0.20 per diluted common share) for impaired assets and restructuring costs in Kenya, China and Colombia (see Note 3 of the notes to the consolidated financial statements for additional information), after-tax restructuring charges of $7 million ($0.09 per diluted common share) relating to our manufacturing optimization plan in North America, and after-tax costs of $3 million ($0.03 per diluted common share) associated with our integration of National Starch.  Additionally, our 2012 results included the reversal of a $13 million valuation allowance that had been recorded against net deferred tax assets of our Korean subsidiary ($0.16 per diluted common share), an after-tax gain from a change in a benefit plan of $3 million ($0.04 per diluted common share) and an after-tax gain from the sale of land of $2 million ($0.02 per diluted common share).  Our results for 2011 included a $58 million NAFTA award ($0.75 per diluted common share) received from the Government of the United Mexican States (see Note 11 of the notes to the consolidated financial statements for additional information) and an after-tax gain of $18 million ($0.23 per diluted common share) pertaining to a change in a postretirement plan (see Note 8 of the notes to the consolidated financial statements for additional information).  Additionally, our 2011 results included after-tax costs of $21 million ($0.26 per diluted common share) relating to the integration of National Starch and after-tax restructuring charges of $7 million ($0.08 per diluted common share) associated with our manufacturing optimization plan in North America.

 

Without the impairment/restructuring charges, the reversal of the Korean deferred tax asset valuation allowance, the gain from the benefit plan change, the gain from the land sale and the integration costs in 2012 and the integration costs, restructuring charges, NAFTA award and gain from the postretirement plan change in 2011, net income and diluted earnings per common share for 2012 would have grown 19 percent from 2011.  This net income growth primarily reflects an increase in operating income in North America and, to a lesser extent, in Asia Pacific.  Reduced financing costs and a lower effective income tax rate also contributed to the improved earnings.

 

Net Sales.  Net sales for 2012 increased to $6.53 billion from $6.22 billion in 2011, as sales growth in North America and Asia Pacific more than offset declines in South America and EMEA.

 

A summary of net sales by reportable business segment is shown below:

 

(in millions)

 

2012

 

2011

 

Increase
(Decrease)

 

% Change

 

North America

 

$

3,741

 

$

3,356

 

$

385

 

11

%

South America

 

1,462

 

1,569

 

(107

)

(7

)%

Asia Pacific

 

816

 

764

 

52

 

7

%

EMEA

 

513

 

530

 

(17

)

(3

)%

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,532

 

$

6,219

 

$

313

 

5

%

 

The increase in net sales primarily reflects improved price/product mix of 6 percent and volume growth of 2 percent driven by stronger demand from our beverage, brewing and food customers, which more than offset unfavorable currency translation of 3 percent attributable to weaker foreign currencies relative to the US dollar.

 

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Net sales in North America increased 11 percent reflecting improved price/product mix of 7 percent and volume growth of 4 percent driven by stronger demand from our beverage, brewing and food customers.  Improved selling prices helped to offset higher corn costs.  Net sales in South America decreased 7 percent, as a 9 percent decline attributable to weaker foreign currencies and a 3 percent volume reduction, more than offset a 5 percent price/product mix improvement.  The volume decline primarily reflects a combination of weaker economic activity in the segment and a transportation strike and labor issues that impacted our customers in Argentina earlier in the year.  Asia Pacific net sales grew 7 percent, as volume growth of 5 percent and price/product mix improvement of 3 percent, more than offset unfavorable currency translation of 1 percent.  EMEA net sales decreased 3 percent, as unfavorable currency translation of 6 percent and a 1 percent volume reduction resulting primarily from the closure of our manufacturing plant in Kenya, more than offset a 4 percent price/product mix improvement.

 

Cost of Sales.  Cost of sales for 2012 increased 4 percent to $5.29 billion from $5.09 billion in 2011.  The increase primarily reflects higher corn costs and volume growth.  Currency translation caused cost of sales for 2012 to decrease approximately 3 percent from 2011, reflecting the impact of weaker foreign currencies.  Gross corn costs per ton for 2012 increased approximately 4 percent from 2011, driven by higher market prices for corn.  Additionally, energy costs increased approximately 2 percent from 2011; primarily reflecting higher costs in Pakistan, where power shortages due to energy infrastructure problems in that country drove costs higher.  Our gross profit margin for 2012 was 19 percent, compared to 18 percent in 2011.

 

Selling, General and Administrative Expenses.  SG&A expenses for 2012 increased to $556 million from $543 million in 2011.  The increase primarily reflects higher compensation-related costs; lower integration expenses and the impact of weaker foreign currencies partially offset these increases.  Currency translation caused operating expenses for 2012 to decrease approximately 3 percent from 2011.  SG&A expenses represented 9 percent of net sales in both 2012 and 2011.  Without integration costs, SG&A expenses, as a percentage of net sales, would have been 8 percent in both 2012 and 2011.

 

Other Income-net.  Other income-net of $22 million for 2012 decreased from other income-net of $98 million in 2011.  This decrease primarily reflects the effects of the $58 million NAFTA award received from the Government of the United Mexican States in the first quarter of 2011 and a $30 million gain associated with a fourth quarter 2011 postretirement benefit plan change.  A $5 million gain from a change in a benefit plan in North America and a $2 million gain from a land sale in the fourth quarter of 2012 partially offset these declines.

 

Operating Income.  A summary of operating income is shown below:

 

(in millions)

 

2012

 

2011

 

Favorable
(Unfavorable)
Variance

 

Favorable 
(Unfavorable)
% Change

 

North America

 

$

408

 

$

322

 

$

86

 

27

%

South America

 

198

 

203

 

(5

)

(2

)%

Asia Pacific

 

95

 

79

 

16

 

20

%

EMEA

 

78

 

84

 

(6

)

(7

)%

Corporate expenses

 

(78

)

(64

)

(14

)

(22

)%

Restructuring/impairment charges

 

(36

)

(10

)

(26

)

(260

)%

Gain from change in benefit plans

 

5

 

30

 

(25

)

(83

)%

Integration costs

 

(4

)

(31

)

27

 

87

%

Gain from sale of land

 

2

 

 

2

 

nm

 

NAFTA award

 

 

58

 

(58

)

nm

 

Operating income

 

$

668

 

$

671

 

$

(3

)

%

 

Operating income for 2012 declined slightly to $668 million from $671 million in 2011.  Operating income for 2012 included $20 million of charges for impaired assets and restructuring costs in Kenya, $11 million of restructuring charges to reduce the carrying value of certain equipment associated with our manufacturing optimization plan in North America, $5 million of charges for impaired assets in China and Colombia, and $4 million of costs pertaining to the integration of

 

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National Starch.  Additionally, operating income for 2012 included the $5 million gain from the benefit plan change in North America and a $2 million gain from the sale of land.  Operating income for 2011 included the $58 million NAFTA award, a $30 million gain from a change in a postretirement plan, $31 million of costs pertaining to the integration of National Starch and $10 million of restructuring charges associated with our North American manufacturing optimization plan.  Without the impairment/restructuring charges, integration costs, the NAFTA award, the gains from the changes in benefit plans, and the gain from the land sale, operating income for 2012 would have increased 12 percent, primarily reflecting strong earnings growth in North America and, to a lesser extent, in Asia Pacific.  Unfavorable currency translation associated with weaker foreign currencies caused operating income to decline by approximately $30 million from 2011.

 

North America operating income increased 27 percent to $408 million from $322 million in 2011.  Improved product selling prices and volume growth helped to offset higher corn costs.  Currency translation associated with a weaker Canadian dollar caused operating income to decrease by approximately $1 million in North America.  South America operating income decreased 2 percent to $198 million from $203 million in 2011.  Improved product price/mix largely offset the unfavorable impacts of higher local product costs; translation effects associated with weaker South American currencies (particularly the Argentine Peso and Brazilian Real), which had a $22 million unfavorable impact on the segment; and lower volumes due to soft demand from a weaker economy.  Asia Pacific operating income rose 20 percent to $95 million from $79 million in 2011.  This increase primarily reflects sales volume growth and improved price/mix, which more than offset the impact of weaker currencies.  Unfavorable translation effects associated with weaker foreign currencies caused Asia Pacific operating income to decrease by approximately $1 million.  EMEA operating income decreased 7 percent to $78 million from $84 million in 2011, primarily reflecting unfavorable currency translation.  Translation effects associated with weaker foreign currencies caused EMEA operating income to decrease by approximately $6 million. While our installation of equipment helped to mitigate energy issues somewhat, energy infrastructure in Pakistan remains problematic and we continue to face challenges resulting from the power shortages in that country.

 

Financing Costs-net.  Financing costs-net decreased to $67 million in 2012 from $78 million in 2011.  The decrease primarily reflects an increase in interest income of $5 million attributable to our higher cash balances, a $4 million decrease in interest expense driven by lower borrowing rates and a $2 million reduction in foreign currency transaction losses.

 

Provision for Income Taxes.  Our effective tax rate was 27.8 percent in 2012, as compared to 28.7 percent in 2011.  Our effective income tax rate for 2012 included the effects of the discrete reversal of a $13 million valuation allowance that had been recorded against net deferred tax assets of our Korean subsidiary, the recognition of an income tax benefit of $8 million related to our $20 million restructuring charge in Kenya and the associated tax write-off of the investment.  Additionally, we recorded a $4 million pretax charge related to the disposition of GFEMS, which is not expected to produce a realizable tax benefit.  Our effective income tax rate for 2011 included the benefit of the one-time recognition of tax free income related to the NAFTA award in pretax income, which lowered our effective income tax rate by 3.5 percentage points.  Without the impact of the items described above, our effective tax rates for 2012 and 2011 would have been approximately 30 percent and 32 percent, respectively.  See also Note 7 of the notes to the consolidated financial statements.

 

Net Income Attributable to Non-controlling Interests.  Net income attributable to non-controlling interests was $6 million in 2012, down from $7 million in 2011.  The decrease reflects lower earnings at our non-wholly-owned operations in Pakistan and China.

 

Comprehensive Income.  We recorded comprehensive income of $366 million in 2012, as compared with $193 million in 2011.  The increase primarily reflects a $97 million favorable variance in the currency translation adjustment and a $94 million favorable variance associated with our cash-flow hedging activity.  The favorable variance in the currency translation adjustment reflects a more moderate weakening in end of period foreign currencies relative to the US dollar in 2012, as compared to 2011, when end of period foreign currency depreciation was more significant.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

At December 31, 2013, our total assets were $5.36 billion, down from $5.59 billion at December 31, 2012.  This decrease primarily reflects translation effects associated with weaker end of period foreign currencies relative to the US dollar.  Total equity decreased to $2.43 billion at December 31, 2013, from $2.46 billion at December 31, 2012.  This decrease primarily reflects our share repurchases, dividends on our common stock and an increase in our accumulated other comprehensive loss driven principally by unfavorable foreign currency translation and losses on cash flow hedges that more than offset actuarial gains on our pension and postretirement benefit obligations.  These declines more than offset the impact of our 2013 net income on total equity.

 

We have a senior, unsecured, $1 billion revolving credit agreement (the “Revolving Credit Agreement”) that matures on October 22, 2017.  Subject to certain terms and conditions, we may increase the amount of the revolving credit facility under the Revolving Credit Agreement by up to $250 million in the aggregate.  All committed pro rata borrowings under the revolving credit facility will bear interest at a variable annual rate based on the LIBOR or prime rate, at our election, subject to the terms and conditions thereof, plus, in each case, an applicable margin based on our leverage ratio (as reported in the financial statements delivered pursuant to the Revolving Credit Agreement).

 

The Revolving Credit Agreement contains customary representations, warranties, covenants, events of default, terms and conditions, including limitations on liens, incurrence of debt, mergers and significant asset dispositions.  We must also comply with a leverage ratio and an interest coverage ratio covenant.  The occurrence of an event of default under the Revolving Credit Agreement could result in all loans and other obligations under the agreement being declared due and payable and the revolving credit facility being terminated.  We met all covenant requirements as of December 31, 2013.

 

At December 31, 2013, there were no borrowings outstanding under our Revolving Credit Agreement.  In addition, we have a number of short-term credit facilities consisting of operating lines of credit.  At December 31, 2013, we had total debt outstanding of $1.81 billion, compared to $1.80 billion at December 31, 2012.  The debt includes $350 million (principal amount) of 3.2 percent notes due 2015, $300 million (principal amount) of 1.8 percent senior notes due 2017, $200 million of 6.0 percent senior notes due 2017, $200 million of 5.62 percent senior notes due 2020, $400 million (principal amount) of 4.625 percent notes due 2020, $250 million (principal amount) of 6.625 percent senior notes due 2037 and $93 million of consolidated subsidiary debt consisting of local country short-term borrowings.  Ingredion Incorporated, as the parent company, guarantees certain obligations of its consolidated subsidiaries.  At December 31, 2013, such guarantees aggregated $225 million.  Management believes that such consolidated subsidiaries will meet their financial obligations as they become due.

 

Historically, the principal source of our liquidity has been our internally generated cash flow, which we supplement as necessary with our ability to borrow on our bank lines and to raise funds in the capital markets.  In addition to borrowing availability under our Revolving Credit Agreement, we also have approximately $487 million of unused operating lines of credit in the various foreign countries in which we operate.

 

The weighted average interest rate on our total indebtedness was approximately 4.4 percent and 4.5 percent for 2013 and 2012, respectively.

 

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Table of Contents

 

Net Cash Flows

 

A summary of operating cash flows is shown below:

 

(in millions)

 

2013

 

2012

 

Net income

 

$

403

 

$

434

 

Depreciation and amortization

 

194 

 

211

 

Write-off of impaired assets

 

 

24

 

Gain from change in benefit plans

 

 

(5

)

Deferred income taxes

 

30

 

(3

)

Changes in working capital

 

(57

)

33

 

Other

 

49

 

38

 

 

 

 

 

 

 

Cash provided by operations

 

$

619

 

$

732

 

 

Cash provided by operations was $619 million in 2013, as compared with $732 million in 2012.  The decrease in operating cash flow for 2013 primarily reflects an increase in our investment in working capital.  Our working capital increase was driven principally by a decrease in accounts payable and accrued liabilities associated with the timing of payments and an increase in accounts receivable due to the timing of collections, partially offset by a reduction in inventory quantities and raw material costs.  Our lower net income also contributed to the decrease in cash provided by operating activities.

 

We had cash inflows of $14 million in 2013 from our margin account activity relating to commodity hedging contracts.  To manage price risk related to corn purchases in North America, we use derivative instruments (corn futures and options contracts) to lock in our corn costs associated with firm-priced customer sales contracts.  We are unable to directly hedge price risk related to co-product sales; however, we enter into hedges of soybean oil (a competing product to our animal feed and corn oil) in order to mitigate the price risk of animal feed and corn oil sales.  As the market price of corn fluctuates, our derivative instruments change in value and we fund any unrealized losses or receive cash for any unrealized gains related to outstanding corn futures and option contracts.  We plan to continue to use corn futures and option contracts to hedge the price risk associated with firm-priced customer sales contracts in our North American business and, accordingly, we will be required to make or be entitled to receive, cash deposits for margin calls depending on the movement in the market price for corn.

 

Listed below are our primary investing and financing activities for 2013:

 

 

 

Sources (Uses)

 

 

 

of Cash

 

 

 

(in millions)

 

Capital expenditures

 

$

(298

)

Payments on debt

 

(53

)

Proceeds from borrowings

 

21

 

Dividends paid (including dividends of $3 to non-controlling interests)

 

(112

)

Repurchases of common stock

 

(228

)

Issuance of common stock

 

14

 

 

On December 13, 2013, our board of directors declared a quarterly cash dividend of $0.42 per share of common stock, an 11 percent increase from the previous quarterly dividend of $0.38 per share.  This dividend was paid on January 27, 2014 to stockholders of record at the close of business on December 31, 2013.

 

We currently anticipate that capital expenditures for 2014 will be in the range of $300 million to $350 million.

 

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We currently expect that our available cash balances, future cash flow from operations and borrowing capacity under our credit facilities will provide us with sufficient liquidity to fund our anticipated capital expenditures, dividends, and other investing and/or financing activities for the foreseeable future.

 

We have not provided federal and state income taxes on accumulated undistributed earnings of certain foreign subsidiaries because these earnings are planned to be permanently reinvested.  It is not practicable to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings.  We do not anticipate the need to repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.  Approximately $341 million of our total cash and cash equivalents of $574 million at December 31, 2013, was held by our operations outside of the United States.  We expect that available cash balances and credit facilities in the United States, along with cash generated from operations, will be sufficient to meet our operating and other cash needs for the foreseeable future.

 

Hedging

 

We are exposed to market risk stemming from changes in commodity prices, foreign currency exchange rates and interest rates.  In the normal course of business, we actively manage our exposure to these market risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities.  These transactions utilize exchange-traded derivatives or over-the-counter derivatives with investment grade counterparties.  Our hedging transactions may include, but are not limited to, a variety of derivative financial instruments such as commodity futures, options and swap contracts, forward currency contracts and options, interest rate swap agreements and treasury lock agreements.  See Note 4 of the notes to the consolidated financial statements for additional information.

 

Commodity Price Risk:

 

Our principal use of derivative financial instruments is to manage commodity price risk in North America relating to anticipated purchases of corn and natural gas to be used in the manufacturing process.  We periodically enter into futures, options and swap contracts for a portion of our anticipated corn and natural gas usage, generally over the following twelve to eighteen months, in order to hedge price risk associated with fluctuations in market prices.  These derivative instruments are recognized at fair value and have effectively reduced our exposure to changes in market prices for these commodities.  We are unable to directly hedge price risk related to co-product sales; however, we enter into hedges of soybean oil (a competing product to our corn oil) in order to mitigate the price risk of corn oil sales.  Unrealized gains and losses associated with marking our commodities-based derivative instruments to market are recorded as a component of other comprehensive income (“OCI”).  At December 31, 2013, our accumulated other comprehensive loss account (“AOCI”) included $32 million of losses, net of tax of $15 million, related to these derivative instruments.  It is anticipated that approximately $31 million of these losses, net of tax of $15 million, will be reclassified into earnings during the next twelve months.  We expect the losses to be offset by changes in the underlying commodities cost.

 

Foreign Currency Exchange Risk:

 

Due to our global operations, including many emerging markets, we are exposed to fluctuations in foreign currency exchange rates.  As a result, we have exposure to translational foreign exchange risk when our foreign operation results are translated to USD and to transactional foreign exchange risk when transactions not denominated in the functional currency of the operating unit are revalued.  We primarily use derivative financial instruments such as foreign currency forward contracts, swaps and options to manage our foreign currency transactional exchange risk.  At December 31, 2013, we had foreign currency forward sales contracts with an aggregate notional amount of $147 million and foreign currency forward purchase contracts with an aggregate notional amount of $78 million that hedged transactional exposures.  The fair value of these derivative instruments is a liability of $5 million at December 31, 2013.

 

We also have foreign currency derivative instruments that hedge certain foreign currency transactional exposures and are designated as cash-flow hedges.  At December 31, 2013, AOCI included $1 million of net gains, net of income taxes, associated with these hedges. It is anticipated that approximately $2 million of losses, net of income taxes of $1 million,

 

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Table of Contents

 

will be reclassified into earnings during the next twelve months.  We expect the losses to be offset by changes in the fair value of the underlying hedged item.

 

We have significant operations in Argentina.  We utilize the official exchange rate published by the Argentine government for re-measurement purposes.  Due to exchange controls put in place by the Argentine government, a parallel market exists for exchanging Argentine pesos to US dollars at less favorable rates than the official rate.  Argentina and other emerging markets have experienced increased devaluation and volatility during the first part of 2014.

 

Interest Rate Risk:

 

We occasionally use interest rate swaps and Treasury Lock agreements (“T-Locks”) to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, or to achieve a desired proportion of fixed versus floating rate debt, based on current and projected market conditions.  We did not have any T-Locks outstanding at December 31, 2013 or 2012.

 

We have interest rate swap agreements that effectively convert the interest rate on our 3.2 percent $350 million senior notes due November 1, 2015 to a variable rate.  These swap agreements call for us to receive interest at a fixed rate (3.2 percent) and to pay interest at a variable rate based on the six-month USD LIBOR rate plus a spread.  We have designated these interest rate swap agreements as hedges of the changes in fair value of the underlying debt obligation attributable to changes in interest rates and account for them as fair value hedges.  The fair value of these interest rate swap agreements approximated $13 million at December 31, 2013 and is reflected in the Consolidated Balance Sheet within other assets, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligation.

 

At December 31, 2013, our accumulated other comprehensive loss account included $8 million of losses (net of tax of $5 million) related to settled Treasury Lock agreements.  These deferred losses are being amortized to financing costs over the terms of the senior notes with which they are associated.  It is anticipated that $2 million of these losses (net of tax of $1 million) will be reclassified into earnings during the next twelve months.

 

Contractual Obligations and Off Balance Sheet Arrangements

 

The table below summarizes our significant contractual obligations as of December 31, 2013.  Information included in the table is cross-referenced to the notes to the consolidated financial statements elsewhere in this report, as applicable.

 

 

 

 

Payments due by period

 

(in millions)
Contractual
Obligations

 

Note
reference

 

Total

 

Less
than 1
year

 

2 – 3
years

 

4 – 5
years

 

More
than 5
years

 

Long-term debt

 

5

 

$

1,700

 

$

 

$

350

 

$

500

 

$

850

 

Interest on long-term debt

 

5

 

678

 

75

 

139

 

104

 

360

 

Operating lease obligations

 

6

 

196

 

44

 

70

 

44

 

38

 

Pension and other postretirement obligations

 

8

 

122

 

12

 

6

 

6

 

98

 

Purchase obligations (a)

 

 

 

1,151

 

288

 

220

 

194

 

449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

3,847

 

$

419

 

$

785

 

$

848

 

$

1,795

 

 

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(a)         The purchase obligations relate principally to power supply and raw material sourcing agreements, including take or pay contracts, which help to provide us with adequate power and raw material supply at certain of our facilities.

(b)         The above table does not reflect unrecognized income tax benefits of $34 million, the timing of which is uncertain. See Note 7 of the notes to the consolidated financial statements for additional information with respect to unrecognized income tax benefits.

 

We currently anticipate that in 2014 we will make cash contributions of $2 million and $8 million to our US and non-US pension plans, respectively.  See Note 8 of the notes to the consolidated financial statements for further information with respect to our pension and postretirement benefit plans.

 

Key Financial Performance Metrics

 

We use certain key financial metrics to monitor our progress towards achieving our long-term strategic business objectives.  These metrics relate to our return on capital employed, our financial leverage, and our management of working capital, each of which is tracked on an ongoing basis.  We assess whether we are achieving an adequate return on invested capital by measuring our “Return on Capital Employed” (“ROCE”) against our cost of capital.  We monitor our financial leverage by regularly reviewing our ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization (“Net Debt to Adjusted EBITDA”) and our “Net Debt to Capitalization” percentage to assure that we are properly financed.  We assess our level of working capital investment by evaluating our “Operating Working Capital as a percentage of Net Sales.”  We believe these metrics provide valuable managerial information to help us run our business and are useful to investors.

 

The metrics below include certain information (including Capital Employed, Adjusted Operating Income, Adjusted EBITDA, Net Debt, Adjusted Current Assets, Adjusted Current Liabilities and Operating Working Capital) that is not calculated in accordance with Generally Accepted Accounting Principles (“GAAP”).  Management uses non-GAAP financial measures internally for strategic decision making, forecasting future results and evaluating current performance.  By disclosing non-GAAP financial measures, management intends to provide a more meaningful, consistent comparison of our operating results and trends for the periods presented.  These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP and reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.  These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with generally accepted accounting principles.

 

Non-GAAP financial measures are not prepared in accordance with GAAP; therefore, the information is not necessarily comparable to other companies.  A reconciliation of non-GAAP historical financial measures to the most comparable GAAP measure is provided in the tables below.

 

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Table of Contents

 

Our calculations of these key financial metrics for 2013 with comparisons to the prior year are as follows:

 

Return on Capital Employed (dollars in millions)

 

2013

 

2012

 

Total equity *

 

$

2,459

 

$

2,133

 

Add:

 

 

 

 

 

Cumulative translation adjustment *

 

335

 

306

 

Share-based payments subject to redemption*

 

19

 

15

 

Total debt *

 

1,800

 

1,949

 

Less:

 

 

 

 

 

Cash and cash equivalents *

 

(609

)

(401

)

Capital employed * (a)

 

$

4,004

 

$

4,002

 

 

 

 

 

 

 

Operating income

 

$

613

 

$

668

 

Adjusted for:

 

 

 

 

 

Gain from change in benefit plans

 

 

(5

)

Gain from sale of land

 

 

(2

)

Integration costs

 

 

4

 

Restructuring / impairment charges

 

 

36

 

Adjusted operating income

 

$

613

 

$

701

 

Income taxes (at effective tax rates of 26.3% in 2013 and 30.4% in 2012)**

 

(161

)

(213

)

Adjusted operating income, net of tax (b)

 

$

452

 

$

488

 

 

 

 

 

 

 

Return on Capital Employed (b¸a)

 

11.3

%

12.2

%

 


Balance sheet amounts used in computing capital employed represent beginning of period balances.

** The effective income tax rate for 2012 excludes the impacts of impairment and restructuring charges, the reversal of the Korea deferred tax asset valuation allowance and integration costs.   Including these charges, the Company’s effective income tax rate for 2012 was 27.8 percent.  Listed below is a schedule that reconciles our effective income tax rate under US GAAP to the adjusted income tax rate.

 

 

 

Income before
Income Taxes (a)

 

Provision for
Income Taxes (b)

 

Effective Income
Tax Rate (b÷a)

 

(dollars in millions)

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

As reported

 

$

547

 

$

601

 

$

144

 

$

167

 

26.3

%

27.8

%

Add back (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

Integration costs

 

 

4

 

 

2

 

 

 

 

 

Reversal of Korea deferred tax asset valuation allowance

 

 

 

 

13

 

 

 

 

 

Restructuring/impairment charges

 

 

36

 

 

13

 

 

 

 

 

Adjusted-non-GAAP

 

$

547

 

$

641

 

$

144

 

$

195

 

26.3

%

30.4

%

 

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Table of Contents

 

Net Debt to Adjusted EBITDA ratio (dollars in millions)

 

2013

 

2012

 

Short-term debt

 

$

93

 

$

76

 

Long-term debt

 

1,717

 

1,724

 

Less: Cash and cash equivalents

 

(574

)

(609

)

Short-term investments

 

 

(19

)

Total net debt (a)

 

$

1,236

 

$

1,172

 

Net income attributable to Ingredion

 

$

396

 

$

428

 

Add back (deduct):

 

 

 

 

 

Gain from change in benefit plans

 

 

(5

)

Gain from land sale

 

 

(2

)

Integration costs

 

 

4

 

Restructuring / impairment charges (*)

 

 

25

 

Net income attributable to non-controlling interest

 

7

 

6

 

Provision for income taxes

 

144

 

167

 

Financing costs, net of interest income of $11 and $10, respectively

 

66

 

67

 

Depreciation and amortization

 

194

 

211

 

Adjusted EBITDA (b)

 

$

807

 

$

901

 

Net Debt to Adjusted EBITDA ratio (a ÷ b)

 

1.5

 

1.3

 

 


*Excludes depreciation related to North American manufacturing optimization plan.

 

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Table of Contents

 

Net Debt to Capitalization percentage (dollars in millions)

 

2013

 

2012

 

Short-term debt

 

$

93

 

$

76

 

Long-term debt

 

1,717

 

1,724

 

Less: Cash and cash equivalents

 

(574

)

(609

)

Short-term investments

 

 

(19

)

Total net debt (a)

 

$

1,236

 

$

1,172

 

Deferred income tax liabilities

 

$

207

 

$

160

 

Share-based payments subject to redemption

 

24

 

19

 

Total equity

 

2,429

 

2,459

 

Total capital

 

$

2,660

 

$

2,638

 

Total net debt and capital (b)

 

$

3,896

 

$

3,810

 

 

 

 

 

 

 

Net Debt to Capitalization percentage (a¸b)

 

31.7

%

30.8

%

 

Operating Working Capital
as a percentage of Net Sales (dollars in millions)

 

2013

 

2012

 

 

 

 

 

 

 

Current assets

 

$

2,214

 

$

2,360

 

Less: Cash and cash equivalents

 

(574

)

(609

)

Short-term investments

 

 

(19

)

Deferred income tax assets

 

(68

)

(65

)

Adjusted current assets

 

$

1,572

 

$

1,667

 

Current liabilities

 

$

820

 

$

933

 

Less: Short-term debt

 

(93

)

(76

)

Deferred income tax liabilities

 

 

(2

)

Adjusted current liabilities

 

$

727

 

$

855

 

Operating working capital (a)

 

$

845

 

$

812

 

Net sales (b)

 

$

6,328

 

$

6,532

 

Operating Working Capital as a percentage of Net Sales (a ¸ b)

 

13.4

%

12.4

%

 

Commentary on Key Financial Performance Metrics:

In accordance with our long-term objectives, we set certain goals relating to these key financial performance metrics that we strive to meet.  At December 31, 2013, we had achieved our established targets.  However, no assurance can be given that we will continue to meet our financial performance metric targets.  See Item 1A “Risk Factors” and Item 7A “Quantitative and Qualitative Disclosures About Market Risk.”  The objectives set out below reflect our current aspirations in light of our present plans and existing circumstances.  We may change these objectives from time to time

 

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in the future to address new opportunities or changing circumstances as appropriate to meet our long-term needs and those of our shareholders.

 

ROCEOur long-term goal is to achieve a ROCE in excess of 8.5 percent.  In determining this performance metric, the negative cumulative translation adjustment is added back to total equity to calculate returns based on the Company’s original investment costs.  Our ROCE for 2013 declined to 11.3 percent from 12.2 percent in 2012, driven by our lower operating income in 2013.

 

Net Debt to Adjusted EBITDA ratio — Our long-term objective is to maintain a ratio of net debt to adjusted EBITDA of less than 2.25.  While this ratio increased to 1.5 at December 31, 2013, from 1.3 at December 31, 2012, it remains below our threshold of 2.25.  The increase in the ratio reflects our reduced earnings coupled with a 5 percent increase in total net debt.

 

Net Debt to Capitalization percentage — Our long-term goal is to maintain a Net Debt to Capitalization percentage in the range of 32 to 35 percent.  At December 31, 2013, our Net Debt to Capitalization percentage was 31.7 percent, up slightly from 30.8 percent a year ago, primarily reflecting the 5 percent increase in total net debt, partially offset by a higher capital base driven by an increase in our deferred income tax liabilities.

 

Operating Working Capital as a percentage of Net Sales — Our long-term goal is to maintain operating working capital in a range of 12 to 14 percent of our net sales.  At December 31, 2013, the metric was 13.4 percent, up from the 12.4 percent of a year ago.  The increase in the metric reflects our lower net sales and higher working capital position.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.  Actual results may differ from these estimates under different assumptions and conditions.

 

We have identified below the most critical accounting policies upon which the financial statements are based and that involve our most complex and subjective decisions and assessments.  Our senior management has discussed the development, selection and disclosure of these policies with members of the Audit Committee of our Board of Directors.  These accounting policies are provided in the 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

 

We have substantial investments in property, plant and equipment and definite-lived intangible assets.  For property, plant and equipment, we recognize the cost of depreciable assets in operations over the estimated useful life of the assets and evaluate the recoverability of these assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.  For definite-lived intangible assets, we recognize the cost of these amortizable assets in operations over their estimated useful life and evaluate the recoverability of the assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.

 

In assessing the recoverability of the carrying value of property, plant and equipment and definite-lived intangible assets, we may have to make projections regarding future cash flows.  In developing these projections, we make a variety of important assumptions and estimates that have a significant impact on our assessments of whether the carrying values of property, plant and equipment and definite-lived intangible assets should be adjusted to reflect impairment.  Among these are assumptions and estimates about the future growth and profitability of the related business unit or asset group, anticipated future economic, regulatory and political conditions in the business unit’s or asset group’s market, the

 

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appropriate discount rates relative to the risk profile of the unit or assets being evaluated and estimates of terminal or disposal values.

 

In 2012, we decided to restructure our business operations in Kenya and close our manufacturing plant in the country.  As part of that decision, we recorded a $20 million restructuring charge, which included fixed asset impairment charges of $6 million to write down the carrying amount of certain assets to their estimated fair values.

 

As part of our ongoing strategic optimization, in 2012 we decided to exit our investment in GFEMS, a non-wholly-owned consolidated subsidiary in China.  In conjunction with that decision, we recorded a $4 million impairment charge to reduce the carrying value of GFEMS to its estimated net realizable value.  We also recorded a $1 million charge for impaired assets in Colombia in 2012.

 

In addition, as part of a manufacturing optimization program developed in conjunction with the acquisition of National Starch to improve profitability, we completed a plan in 2012 that optimized our production capabilities at certain of our North American facilities.  As a result, we recorded restructuring charges to write-off certain equipment by the plan completion date.  We recorded charges of $11 million in 2012, of which $10 million represented accelerated depreciation on the equipment.

 

Through our continual assessment to optimize our operations, we address whether there is a need for additional consolidation of manufacturing facilities or to redeploy assets to areas where we can expect to achieve a higher return on our investment.  This review may result in the closing or selling of certain of our manufacturing facilities.  The closing or selling of any of the facilities could have a significant negative impact on the results of operations in the year that the closing or selling of a facility occurs.

 

Even though it was determined that there was no additional long-lived asset impairment as of December 31, 2013, the future occurrence of a potential indicator of impairment, such as a significant adverse change in the business climate that would require a change in our assumptions or strategic decisions made in response to economic or competitive conditions, could require us to perform tests of recoverability in the future.

 

Goodwill and Indefinite-Lived Intangible Assets

 

Our methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a number of factors, including valuations performed by third-party appraisers when appropriate.  Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed.  We have identified several reporting units for which cash flows are determinable and to which goodwill may be allocated.  Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative excess fair value of each reporting unit.  In addition, we have certain indefinite-lived intangible assets in the form of trade names and trademarks.  The carrying value of goodwill and indefinite-lived intangible assets at December 31, 2013 was $535 million and $132 million, respectively.

 

We perform our goodwill and indefinite-lived intangible asset impairment tests annually as of October 1, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

 

In performing our impairment tests for goodwill, management makes certain estimates and judgments. These estimates and judgments include the identification of reporting units and the determination of fair values of reporting units, which management estimates using both discounted cash flow analyses and an analysis of market multiples.  Significant assumptions used in the determination of fair value for reporting units include estimates for discount and long-term net sales growth rates, in addition to operating and capital expenditure requirements.  We considered significant changes in discount rates for the reporting units based on current market interest rates and specific risk factors within each geographic region.  We also evaluated qualitative factors, such as legal, regulatory, or competitive forces, in estimating the impact to the fair value of the reporting units noting no significant changes that would result in any reporting unit failing the impairment test.  Changes in assumptions concerning projected results or other underlying assumptions could

 

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have a significant impact on the fair value of the reporting units in the future.  Based on the results of our assessment as of October 1, 2013 (although the estimated fair values of our Southern Cone of South America and Brazil reporting units decreased compared to the 2012 assessment due to recent trends experienced in these reporting units), we concluded it was more likely than not that the fair value of all reporting units was greater than their carrying value.

 

In performing the qualitative annual impairment assessment for indefinite-lived intangible assets, we considered various factors in determining if it was more likely than not that the fair value of these indefinite-lived intangible assets was greater than their carrying value.  We evaluated net sales attributable to these intangible assets as compared to original projections and evaluated future projections of net sales related to these assets.  In addition, we considered market and industry conditions in the reporting units in which these intangible assets reside noting no significant changes that would result in a failed Step One.  Based on the results of this qualitative assessment as of October 1, 2013, we concluded that it was more likely than not that the fair value of these indefinite-lived intangible assets was greater than their carrying value.

 

Income Taxes

 

We recognize the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities and provide a valuation allowance when deferred tax assets are not more likely than not to be realized.  We have considered forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies in determining the need for a valuation allowance.  In the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, we would increase the valuation allowance and make a corresponding charge to earnings in the period in which we make such determination.  Likewise, if we later determine that we are more likely than not to realize the deferred tax assets, we would reverse the applicable portion of the previously provided valuation allowance.

 

We are regularly audited by various taxing authorities, and sometimes these audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes.  We establish reserves when, despite our belief that our tax return positions are appropriate and supportable under local tax law, we believe there is uncertainty with respect to certain positions and we may not succeed in realizing the tax benefit.  We evaluate these unrecognized tax benefits and related reserves each quarter and adjust the reserves and the related interest and penalties in light of changing facts and circumstances regarding the probability of realizing tax benefits, such as the settlement of a tax audit or the expiration of a statute of limitations.  We believe the estimates and assumptions used to support our evaluation of tax benefit realization are reasonable.  However, final determinations of prior-year tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially different than estimates reflected in assets and liabilities and historical income tax provisions.  The outcome of these final determinations could have a material effect on our income tax provision, net income, or cash flows in the period in which that determination is made.  We believe our tax positions comply with applicable tax law and that we have adequately provided for any known tax contingencies.

 

No taxes have been provided on undistributed foreign earnings that are planned to be indefinitely reinvested.  If future events, including changes in tax law, material changes in estimates of cash, working capital and long-term investment requirements, necessitate that these earnings be distributed, an additional provision for income and withholding taxes may apply, which could materially affect our future effective tax rate.

 

Retirement Benefits

 

We sponsor non-contributory defined benefit plans covering substantially all employees in the United States and Canada, and certain employees in other foreign countries.  We also provide healthcare and life insurance benefits for retired employees in the United States, Canada and Brazil.  In order to measure the expense and obligations associated with these benefits, our management must make a variety of estimates and assumptions including discount rates, expected long-term rates of return, rate of compensation increases, employee turnover rates, retirement rates, mortality rates and other factors.  We review our actuarial assumptions on an annual basis as of December 31 (or more frequently if a significant event requiring remeasurement occurs) and modify our assumptions based on current rates and trends when it is appropriate to do so.  The effects of modifications are recognized immediately on the balance sheet, but are generally

 

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amortized into operating earnings over future periods, with the deferred amount recorded in AOCI.  We believe the assumptions utilized in recording our obligations under our plans, which are based on our experience, market conditions, and input from our actuaries, are reasonable. We use third-party specialists to assist management in evaluating our assumptions and estimates, as well as to appropriately measure the costs and obligations associated with our retirement benefit plans.  Had we used different estimates and assumptions with respect to these plans, our retirement benefit obligations and related expense could vary from the actual amounts recorded, and such differences could be material.  Additionally, adverse changes in investment returns earned on pension assets and discount rates used to calculate pension and postretirement benefit related liabilities or changes in required funding levels may have an unfavorable impact on future expense and cash flow.  Net periodic pension and postretirement benefit cost for all of our plans was $25 million in 2013 and $24 million in 2012.

 

We determine our assumption for the discount rate used to measure year-end pension and postretirement obligations based on high-quality fixed-income investments that match the duration of the expected benefit payments, which has been benchmarked using a long-term, high-quality AA corporate bond index.  The weighted average discount rate used to determine our obligations under US pension plans for December 31, 2013 and 2012 was 4.60 percent and 3.60 percent, respectively.  The weighted average discount rate used to determine our obligations under non-US pension plans for December 31, 2013 and 2012 was 5.60 percent and 4.85 percent, respectively.  The weighted average discount rate used to determine our obligations under our postretirement plans for December 31, 2013 and 2012 was 6.47 percent and 5.44 percent, respectively.

 

A one-percentage point decrease in the discount rates at December 31, 2013 would have increased the accumulated benefit obligation and projected benefit obligation by the following amounts (millions):

 

US Pension Plans

 

 

 

 

 

 

 

Accumulated benefit obligation

 

$

30

 

Projected benefit obligation

 

$

31

 

 

 

 

 

Non-US Pension Plans

 

 

 

 

 

 

 

Accumulated benefit obligation

 

$

29

 

Projected benefit obligation

 

$

36

 

 

 

 

 

Postretirement Plans

 

 

 

 

 

 

 

Accumulated benefit obligation

 

$

8

 

 

The Company’s investment policy for its pension plans is to balance risk and return through diversified portfolios of passively-managed equity index instruments, fixed income index securities, and short-term investments. Maturities for fixed income securities are managed such that sufficient liquidity exists to meet near-term benefit payment obligations.  The asset allocation is reviewed regularly and portfolio investments are rebalanced to the targeted allocation when considered appropriate.  We have assumed an expected long-term rate of return on assets, which is based on the fair value of plan assets, of 7.25 percent for US plans and 6.10 percent for Canadian plans.  In developing the expected long-term rate of return assumption on plan assets, which consist mainly of US and Canadian equity and debt securities, management evaluated historical rates of return achieved on plan assets and the asset allocation of the plans, input from our independent actuaries and investment consultants, and historical trends in long-term inflation rates. Projected return estimates made by such consultants are based upon broad equity and bond indices. We also maintain several funded pension plans in other international locations.  The expected returns on plan assets are determined based on each plan’s investment approach and asset allocations.  A hypothetical 25 basis point decrease in the expected long-term rate of return assumption for 2014 would increase net periodic pension cost for the US and Canada plans by $0.7 million and $0.5 million, respectively.

 

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Health care cost trend rates are used in valuing our postretirement benefit obligations and are established based upon actual health care cost trends and consultation with actuaries and benefit providers.  At December 31, 2013, the health care trend rate assumptions for the next year for the US, Canada and Brazil plans were 6.90 percent, 7.20 percent and 8.66 percent, respectively.

 

The sensitivities of service cost and interest cost and year-end benefit obligations to changes in health care trend rates (both initial and ultimate rates) for the postretirement benefit plans as of December 31, 2013 are as follows:

 

 

 

2013

 

One-percentage point increase in trend rates:

 

 

 

·                  Increase in service cost and interest cost components

 

$1 million

 

·                  Increase in year-end benefit obligations

 

$6 million

 

 

 

 

 

One-percentage point decrease in trend rates:

 

 

 

·                  Decrease in service cost and interest cost components

 

($1 million)

 

·                  Decrease in year-end benefit obligations

 

($4 million)

 

 

See also Note 8 of the notes to the consolidated financial statements for more information related to our benefit plans.

 

New Accounting Standards

 

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.  This Update clarifies the guidance pertaining to the release of the cumulative translation adjustment (“CTA”) to resolve diversity in practice.  The Update clarifies that when a company ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the company should release any related CTA into net income.  In such instances, the CTA should be released into net income only if a sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.  The Update also requires the release of the CTA (or applicable pro rata portion thereof) upon the sale or partial sale of an equity method investment that is a foreign entity and for a step acquisition in which the acquirer held an equity method investment prior to obtaining control.  The guidance in this Update is effective prospectively for fiscal years beginning after December 15, 2013, and interim periods within those fiscal years.  The adoption of the guidance contained in this Update will impact the accounting for the CTA upon the de-recognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity; and the effect will be dependent upon a relevant transaction at that time.

 

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  This Update provides guidance pertaining to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists, to resolve diversity in practice.  The Update requires that companies present an unrecognized tax benefit as a reduction of a deferred tax asset for a tax loss or credit carryforward on the balance sheet when (a) the tax law requires the company to use the tax loss or credit carryforward to satisfy amounts payable upon disallowance of the tax position; or (b) the tax loss or credit carryforward is available to satisfy amounts payable upon disallowance of the tax position, and the company intends to use the deferred tax asset for that purpose. The guidance in this Update is effective prospectively for fiscal years beginning after December 15, 2013, and interim periods within those fiscal years.  Early adoption and retrospective application are permitted.  The adoption of the guidance in this Update is not expected to have a material impact on our Consolidated Financial Statements.

 

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Forward-Looking Statements

 

This Form 10-K contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The Company intends these forward-looking statements to be covered by the safe harbor provisions for such statements.  Forward-looking statements include, among other things, any statements regarding the Company’s prospects or future financial condition, earnings, revenues, tax rates, capital expenditures, expenses or other financial items, any statements concerning the Company’s prospects or future operations, including management’s plans or strategies and objectives therefor and any assumptions, expectations or beliefs underlying the foregoing.  These statements can sometimes be identified by the use of forward looking words such as “may,” “will,” “should,” “anticipate,” “believe,” “plan,” “project,” “estimate,” “expect,” “intend,” “continue,” “pro forma,” “forecast,” “outlook” or other similar expressions or the negative thereof.  All statements other than statements of historical facts in this report or referred to in or incorporated by reference into this report are “forward-looking statements.”  These statements are based on current expectations, but are subject to certain inherent risks and uncertainties, many of which are difficult to predict and are beyond our control.  Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, 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 expressed in or implied by these statements, based on various factors, including the effects of global economic conditions, including, particularly, continuation or worsening of the current economic, currency and political conditions in South America and economic conditions in Europe, and their impact on our sales volumes and pricing of our products, our ability to collect our receivables from customers and our ability to raise funds at reasonable rates; fluctuations in worldwide markets for corn and other commodities, and the associated risks of hedging against such fluctuations; fluctuations in the markets and prices for our co-products, particularly corn oil; fluctuations in aggregate industry supply and market demand; the behavior of financial markets, including foreign currency fluctuations and fluctuations in interest and exchange rates; continued volatility and turmoil in the capital markets; the commercial and consumer credit environment; general political, economic, business, market and weather conditions in the various geographic regions and countries in which we buy our raw materials or manufacture or sell our products; future financial performance of major industries which we serve, including, without limitation, the food and beverage, pharmaceuticals, paper, corrugated, textile and brewing industries; energy costs and availability, freight and shipping costs, and changes in regulatory controls regarding quotas, tariffs, duties, taxes and income tax rates; operating difficulties; availability of raw materials, including tapioca and the specific varieties of corn upon which our products are based; energy issues in Pakistan; boiler reliability; our ability to effectively integrate and operate acquired businesses; our ability to achieve budgets and to realize expected synergies; our ability to complete planned maintenance and investment projects successfully and on budget; labor disputes; genetic and biotechnology issues; changing consumption preferences including those relating to high fructose corn syrup; increased competitive and/or customer pressure in the starch processing industry; and the outbreak or continuation of serious communicable disease or hostilities including acts of terrorism.  Our forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement as a result of new information or future events or developments.  If we do update or correct one or more of these statements, investors and others should not conclude that we will make additional updates or corrections.  For a further description of these and other risks, see Item 1A-Risk Factors above and subsequent reports on Forms 10-Q or 8-K.

 

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Exposure. We are exposed to interest rate risk on our variable-rate debt and price risk on our fixed-rate debt.  As of December 31, 2013, approximately 77 percent or $1.4 billion of our borrowings are fixed rate debt and the remaining 23 percent or approximately $0.4 billion of our debt is subject to changes in short-term rates, which could affect our interest costs.  We assess market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential change in earnings, fair values and cash flows based on a hypothetical 1 percentage point change in interest rates at December 31, 2013.  A hypothetical increase of 1 percentage point in the weighted average floating interest rate would increase our annual interest expense by approximately $4 million.  See also Note 5 of the notes to the consolidated financial statements entitled “Financing Arrangements” for further information.

 

At December 31, 2013 and 2012, the carrying and fair values of long-term debt were as follows:

 

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2013

 

2012

 

(in millions)

 

Carrying
amount

 

Fair
value

 

Carrying
amount

 

Fair
value

 

 

 

 

 

 

 

 

 

 

 

4.625% senior notes, due November 1, 2020

 

$

399

 

$

420

 

$

399

 

$

448

 

3.2% senior notes, due November 1, 2015

 

350

 

363

 

350

 

368

 

1.8% senior notes, due September 25, 2017

 

298

 

296

 

298

 

300

 

6.625% senior notes, due April 15, 2037

 

257

 

281

 

257

 

315

 

6.0% senior notes, due April 15, 2017

 

200

 

219

 

200

 

227

 

5.62% senior notes, due March 25, 2020

 

200

 

221

 

200

 

236

 

Fair value adjustment related to hedged fixed rate debt instrument

 

13

 

13

 

20

 

20

 

Total long-term debt

 

$

1,717

 

$

1,813

 

$

1,724

 

$

1,914

 

 

A hypothetical change of 1 percentage point in interest rates would change the fair value of our fixed rate debt at December 31, 2013 by approximately $95 million.  Since we have no current plans to repurchase our outstanding fixed-rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt is not expected to have an effect on our consolidated financial statements.

 

On March 25, 2011, we entered into interest rate swap agreements that effectively convert the interest rate on our 2015 Notes to a variable rate.  These swap agreements call for us to receive interest at a fixed rate (3.2 percent) and to pay interest at a variable rate based on the six-month USD LIBOR rate plus a spread.  We have designated these interest rate swap agreements as hedges of the changes in fair value of the underlying debt obligation attributable to changes in interest rates and account for them as fair value hedges.  The fair value of these interest rate swap agreements approximated $13 million at December 31, 2013 and is reflected in the Consolidated Balance Sheet within other assets, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligation.

 

Raw Material and Energy Costs.  Our finished products are made primarily from corn.  In North America, we sell a large portion of finished products at firm prices established in supply contracts typically lasting for periods of up to one year.  In order to minimize the effect of volatility in the cost of corn related to these firm-priced supply contracts, we enter into corn futures contracts or take other hedging positions in the corn futures market.  These contracts typically mature within one year.  At expiration, we settle the derivative contracts at a net amount equal to the difference between the then-current price of corn and the futures contract price.  While these hedging instruments are subject to fluctuations in value, changes in the value of the underlying exposures we are hedging generally offset such fluctuations.  While the corn futures contracts or other hedging positions are intended to minimize the volatility of corn costs on operating profits, occasionally the hedging activity can result in losses, some of which may be material.  Outside of North America, sales of finished products under long-term, firm-priced supply contracts are not material.

 

Energy costs represent approximately 10 percent of our operating costs.  The primary use of energy is to create steam in the production process and to dry product.  We consume coal, natural gas, electricity, wood and fuel oil to generate energy.  The market prices for these commodities vary depending on supply and demand, world economies and other factors.  We purchase these commodities based on our anticipated usage and the future outlook for these costs.  We cannot assure that we will be able to purchase these commodities at prices that we can adequately pass on to customers to sustain or increase profitability.  We use derivative financial instruments, such as over-the-counter natural gas swaps, to hedge portions of our natural gas costs, primarily in our North American operations.

 

At December 31, 2013, we had outstanding futures and option contracts that hedged approximately 68 million bushels of forecasted corn purchases.  Also at December 31, 2013, we had outstanding swap and option contracts that hedged approximately 12 million mmbtu’s of forecasted natural gas purchases.  Based on our overall commodity hedge position at December 31, 2013, a hypothetical 10 percent decline in market prices applied to the fair value of the instruments would result in a charge to other comprehensive income of approximately $20 million, net of income tax benefit.  It should be noted that any change in the fair value of the contracts, real or hypothetical, would be substantially offset by an inverse change in the value of the underlying hedged item.

 

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Foreign Currencies.  Due to our global operations, we are exposed to fluctuations in foreign currency exchange rates.  As a result, we have exposure to translational foreign exchange risk when our foreign operation results are translated to USD and to transactional foreign exchange risk when transactions not denominated in the functional currency of the operating unit are revalued.  We have significant operations in Argentina.  We utilize the official exchange rate published by the Argentina government for re-measurement purposes.  Due to exchange controls put in place by the Argentina government, a parallel market exists for exchanging Argentine pesos to US dollars at less favorable rates than the official rate.  Argentina and other emerging markets have experienced increased devaluation and volatility during the first part of 2014.

 

We selectively use derivative instruments such as forward contracts, currency swaps and options to manage transactional foreign exchange risk.  Based on our overall foreign currency transactional exposure at December 31, 2013, a hypothetical 10 percent decline in the value of the USD would have resulted in a transactional foreign exchange gain of approximately $1 million.  At December 31, 2013, our accumulated other comprehensive loss account included in the equity section of our consolidated balance sheet includes a cumulative translation loss of $489 million.  The aggregate net assets of our foreign subsidiaries where the local currency is the functional currency approximated $1.6 billion at December 31, 2013.  A hypothetical 10 percent decline in the value of the USD relative to foreign currencies would have resulted in a reduction to our cumulative translation loss and a credit to other comprehensive income of approximately $180 million.

 

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ITEM 8.                         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Ingredion Incorporated
Index to Consolidated Financial Statements and Supplementary Data

 

Page

 

 

 

Report of Independent Registered Public Accounting Firm

 

49

 

 

 

Consolidated Statements of Income

 

51

 

 

 

Consolidated Statements of Comprehensive Income

 

52

 

 

 

Consolidated Balance Sheets

 

53

 

 

 

Consolidated Statements of Equity and Redeemable Equity

 

54

 

 

 

Consolidated Statements of Cash Flows

 

55

 

 

 

Notes to the Consolidated Financial Statements

 

56

 

 

 

Quarterly Financial Data (Unaudited)

 

88

 

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Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Ingredion Incorporated:

 

We have audited the accompanying consolidated balance sheets of Ingredion Incorporated and subsidiaries (formerly known as Corn Products International, Inc.) (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity and redeemable equity, and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ingredion Incorporated and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria

 

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established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

 

/s/ KPMG LLP

 

Chicago, Illinois

 

February 24, 2014

 

 

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INGREDION INCORPORATED

Consolidated Statements of Income

 

Years Ended December 31,

(in millions, except per share amounts)

 

 

 

2013

 

2012

 

2011

 

Net sales before shipping and handling costs

 

$

6,653

 

$

6,868

 

$

6,544

 

Less - shipping and handling costs

 

325

 

336

 

325

 

Net sales

 

6,328

 

6,532

 

6,219

 

Cost of sales

 

5,197

 

5,294

 

5,093

 

Gross profit

 

1,131

 

1,238

 

1,126

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

534

 

556

 

543

 

Other (income) - net

 

(16

)

(22

)

(98

)

Restructuring/impairment charges

 

 

36

 

10

 

 

 

518

 

570

 

455

 

 

 

 

 

 

 

 

 

Operating income

 

613

 

668

 

671

 

 

 

 

 

 

 

 

 

Financing costs-net

 

66

 

67

 

78

 

 

 

 

 

 

 

 

 

Income before income taxes

 

547

 

601

 

593

 

Provision for income taxes

 

144

 

167

 

170

 

Net income

 

403

 

434

 

423

 

Less - Net income attributable to non-controlling interests

 

7

 

6

 

7

 

Net income attributable to Ingredion

 

$

396

 

$

428

 

$

416

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

77.0

 

76.5

 

76.4

 

Diluted

 

78.3

 

78.2

 

78.2

 

 

 

 

 

 

 

 

 

Earnings per common share of Ingredion:

 

 

 

 

 

 

 

Basic

 

$

5.14

 

$

5.59

 

$

5.44

 

Diluted

 

5.05

 

5.47

 

5.32

 

 

See notes to the consolidated financial statements.

 

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INGREDION INCORPORATED

Consolidated Statements of Comprehensive Income

 

Years ended December 31,

 

 

 

 

 

 

 

(in millions)

 

2013

 

2012

 

2011

 

Net income

 

$

403

 

$

434

 

$

423

 

Other comprehensive income:

 

 

 

 

 

 

 

Gains (losses) on cash-flow hedges, net of income tax effect of $29, $25 and $19, respectively

 

(64

)

43

 

29

 

Reclassification adjustment for losses (gains) on cash-flow hedges included in net income, net of income tax effect of $19, $15 and $61, respectively

 

41

 

(25

)

(105

)

Actuarial gains (losses) on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $32, $27 and $4, respectively

 

63

 

(56

)

(10

)

Losses (gains) related to pension and other postretirement obligations reclassified to earnings, net of income tax effect of $3, $2 and $5, respectively

 

5

 

5

 

(11

)

Unrealized gain on investment, net of income tax effect

 

1

 

 

 

Currency translation adjustment

 

(154

)

(29

)

(126

)

Comprehensive income

 

$

295

 

$

372

 

$

200

 

Less: Comprehensive income attributable to non-controlling interests

 

7

 

6

 

7

 

Comprehensive income attributable to Ingredion