10-K 1 a14-24691_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, 2014

 

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

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 $75.04 on June 30, 2014, and, for the purpose of this calculation only, the assumption that all of the Registrant’s directors and executive officers are affiliates) was approximately $5,319,000,000.

 

The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of February 19, 2015, was 71,505,000.

 

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 2015 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2014.

 

 

 


 


Table of Contents

 

INGREDION INCORPORATED

FORM 10-K
TABLE OF CONTENTS

 

 

 

Page

Part I

 

 

 

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

15

Item 1B.

Unresolved Staff Comments

21

Item 2.

Properties

21

Item 3.

Legal Proceedings

21

Item 4.

Mine Safety Disclosures

23

 

 

 

Part II

 

 

 

 

 

Item 5.

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

23

Item 6.

Selected Financial Data

25

Item 7.

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

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 8.

Financial Statements and Supplementary Data

51

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

94

Item 9A.

Controls and Procedures

94

Item 9B.

Other Information

94

 

 

 

Part III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

95

Item 11.

Executive Compensation

95

Item 12.

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

95

Item 13.

Certain Relationships and Related Transactions, and Director Independence

95

Item 14.

Principal Accountant Fees and Services

95

 

 

 

Part IV

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

95

 

 

 

Signatures

 

101

 

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, industrial, pharmaceutical and personal care 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, we 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. 

 

On October 14, 2014, we entered into a definitive agreement to acquire Penford Corporation (“Penford”), a US-based leader in specialty ingredients for food and non-food applications.  The acquisition has been approved by the boards of directors of both companies and by the shareholders of Penford.  It is subject to approval by regulators as well as to other customary closing conditions.  The purchase price is approximately $340 million, including the assumption of debt.  Penford, headquartered in Centennial, Colorado had net sales of $444 million in fiscal year 2014.  Penford employs approximately 443 people and operates six plants in the United States, all of which manufacture specialty starches.  The acquisition will provide Ingredion with an enhanced portfolio of specialty and industrial products and further improve our ability to offer customers a broad range of value added ingredient solutions for a variety of their evolving needs.  The acquisition is expected to close in the first quarter of 2015 pending regulatory approval.

 

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 $5.67 billion in 2014.  Approximately 55 percent of our 2014 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 14 percent and 10 percent, respectively.

 

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Products

 

Sweetener Products. Our sweetener products represented approximately 39 percent, 42 percent and 44 percent of our net sales for 2014, 2013 and 2012, 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 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; acting as a bulking, drying and anti-caking agent; serving as a carrier; providing freezing point and crystallization control; and aiding in fermentation.  Dextrose is also a fermentation agent in the production of light beer.  In pharmaceutical applications dextrose is used in IV solutions as well as an excipient suitable for direct compression in tableting.

 

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

 

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

 

Starch Products.  Our starch products represented approximately 43 percent, 41 percent and 37 percent of our net sales for 2014, 2013 and 2012, 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.

 

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Specialty Ingredients.  We consider certain of our starch and sweetener products to be specialty ingredients.  Specialty ingredients comprised approximately 24 percent of our net sales for 2014, up from 21 percent in 2013.  Our specialty ingredients are aligned with growing market and consumer trends such as health and wellness, clean-label, affordability, indulgence and sustainability.  We plan to drive growth for our specialty ingredients portfolio by leveraging the following six platforms (or springboards): Wholesome, Texture, Nutrition, Sweetness, Delivery Systems and Green Solutions.

 

Wholesome - Clean-label solutions that enable front-of-pack claims

 

Nutrition - Nutritional carbohydrates with benefits of digestive health and energy management

 

Texture - Precise texture solutions designed to optimize consumer acceptance and build back texture

 

 

 

 

 

Delivery Systems - Functional ingredients designed to deliver superior emulsification and protection of flavors and other active ingredients

 

Sweetness - Sweetening systems that provide affordability, natural, reduced calorie, and sugar-free solutions

 

Green Solutions - Nature-based materials for replacement of synthetics in non-food applications

 

Wholesome: Specialty ingredients that provide clean-label solutions enabling front-of-pack claims for our customers.  Products include Novation clean label functional starches, value added pulse-based ingredients and Gluten Free offerings.  Texture: Specialty ingredients that provide food texture solutions for consumer acceptance and build back texture.  Include starch systems that replace more expensive ingredients and are designed to optimize customer formulation costs, texturizers that create rich, creamy mouth feel, and products that enhance texture in healthier offerings.  Nutrition: Specialty ingredients that provide nutritional carbohydrates with benefits of digestive health and energy management.  Our fibers and complimentary nutritional ingredients address the leading health and wellness concerns of consumers, including digestive health, infant nutrition, weight and energy management, aging and immunity.  Sweetness: Specialty ingredients that provide affordability, natural, reduced calorie and sugar-free sweetener solutions for our customers.  We have a broad portfolio of nutritive and non-nutritive sweeteners, including high potency sweeteners and our naturally based stevia sweetener.  Delivery Systems: Functional ingredients that are designed to deliver superior emulsification and protection of flavors and other active ingredients.  Products include starches to help emulsify or mix natural colors in beverages and specialty starches that encapsulate and protect flavors and vitamins in pharmaceuticals and spray-dried food ingredients.  Green Solutions: Bio-based solutions that help manufacturers become more sustainable by replacing synthetic materials with nature-based ingredients in personal care, home care and other industrial segments.

 

Each springboard addresses multiple consumer trends.  For instance, specialty texture solutions are leveraged to address consumer health and wellness, affordability and indulgence demands while wholesome solutions can address clean-label, indulgence and health and wellness consumer demands.  Specialty ingredients that provide nutrition solutions for health and wellness can also address food indulgence and convenience desires of consumers.  Specialty ingredients that provide sweetness solutions for health and wellness demands can also deliver affordability and food indulgence solutions.

 

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Co-Products and others.  Co-products and others accounted for 18 percent, 17 percent and 19 percent of our net sales for 2014, 2013 and 2012, 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.

 

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 2014, approximately 55 percent of our net sales were derived from operations in North America, while net sales from operations in South America represented 21 percent.  Net sales from operations in Asia Pacific and EMEA represented approximately 14 percent and 10 percent, respectively, of our 2014 net sales.  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 Brazil, Colombia and Ecuador and the Southern Cone of South America, which includes Argentina, Chile, 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 &

 

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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.

 

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 2014:

 

 

 

Total

 

North

 

South

 

 

 

 

 

Industries Served

 

Company

 

America

 

America

 

APAC

 

EMEA

 

 

 

 

 

 

 

 

 

 

 

 

 

Food

 

51

%

48

%

43

%

65

%

63

%

Beverage

 

13

%

17

%

10

%

7

%

1

%

Animal Nutrition

 

13

%

14

%

17

%

6

%

9

%

Paper and Corrugating

 

9

%

9

%

9

%

14

%

3

%

Brewing

 

7

%

7

%

14

%

3

%

0

%

Other

 

7

%

5

%

7

%

5

%

24

%

Total

 

100

%

100

%

100

%

100

%

100

%

 

No customer accounted for 10 percent or more of our net sales in 2014, 2013 or 2012.

 

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.

 

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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 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 2014 was approximately $37 million.

 

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 three to ten 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, 2014 we had approximately 11,400 employees, of which approximately 1,900 were located in the United States.  Approximately 36 percent of US and 48 percent of our non-US employees are unionized.  Of our total, 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

 

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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 2014.  We may also be required to comply with federal, state, foreign and local laws regulating food handling and storage.  We believe these laws and regulations have not negatively affected our competitive position.

 

Our operations are also subject to various federal, state, foreign and local laws and regulations with respect to environmental matters, including air and water quality and underground fuel storage tanks, and other regulations intended to protect public health and the environment.  We operate industrial boilers that fire natural gas, coal, or biofuels to operate our manufacturing facilities and they 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 2014, we spent approximately $9 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 $8 million for environmental facilities and programs in both 2015 and 2016.

 

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

 

61

 

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 MIT Corporation and 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

 

49

 

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 International, Inc. now Unilever Bestfoods (“CPC”) as Operations Attorney in September 1996 and held that position until 2002.  CPC was a worldwide group of businesses, principally engaged in three major industry segments: consumer foods, baking and corn refining.  Ingredion commenced operations as a spin-off of CPC’s corn refining business.  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 also serves as a trustee of the John Marshall Law School and 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

 

64

 

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

 

59

 

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,

 

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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 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

 

58

 

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 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

 

60

 

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

 

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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 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

 

42

 

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

 

46

 

Senior Vice President and President, Asia Pacific since September 16, 2014.  Mr. Kokke previously served as Vice President and General Manager, Asia Pacific from January 6, 2014 to September 15, 2014.  Prior to that, Mr. Kokke 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 of CSM NV, a global food ingredients supplier, where he had responsibility for the global Purac Food & Nutrition business from 2006 to 2009.  Prior thereto, Mr. Kokke was Director of Strategy and Business Development at CSM NV.  Prior to that he held a variety of roles of increasing responsibility in sales, business development, marketing and general management in Unilever’s Loders Crocklaan Group.  Mr. Kokke holds a Master degree in economics from the University of Amsterdam.

 

 

 

 

 

John F. Saucier

 

61

 

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

 

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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 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

 

53

 

Senior Vice President, Operational Excellence, Sustainability and Chief Supply Chain Officer since May 28, 2014.  From January 1, 2014 to May 27, 2014, Mr. Stefansic served as Senior Vice President, Operational Excellence and Environmental, Health, Safety & Sustainability.  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 Corporation 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

 

53

 

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

 

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National Starch for more than 27 years in various positions of increasing responsibility, first in technical, then marketing and then international business management positions. Mr. Zallie also serves as a director of Innophos Holdings, Inc., a leading international producer of performance-critical and nutritional specialty ingredients with

applications in food, beverage, dietary supplements, pharmaceutical, oral care and industrial end markets.  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.

 

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

 

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

 

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

 

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

 

In addition, the volatile worldwide economic conditions and market instability may make it difficult for us, our customers and our suppliers to accurately forecast future product demand trends, which could cause us to produce excess products that 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.

 

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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 pricing controls on many consumer products instituted by the Argentina government, it has taken longer than in the past to achieve pricing improvement in that country.  Also, the recent strength in the US dollar may provide some challenges to our sales prices as it could take an extended period of time to fully recapture the impact of foreign currency devaluation.

 

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.

 

Energy costs represent approximately 11 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 impact the demand from our customers due to their inability to produce their end products because of the shortage of reliable energy.

 

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

 

In North America, we sell a large portion of our finished products 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 occasionally enter into hedges of soybean oil (a competing product to our animal feed and corn oil) in order to mitigate the price risk of animal feed and corn oil sales.  These derivative contracts typically mature within one year.  At expiration, we settle the derivative contracts at a net amount equal to the difference between the then-current price of 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 our cash flow.  We fund any unrealized losses or receive cash for any unrealized gains on futures contracts on a daily basis.  While the corn futures contracts or hedging positions are intended to minimize the effect of volatility of corn costs on operating profits, the hedging activity can result in losses, some of which may be material.  Outside of North America, sales of finished products under long-term, firm-priced supply contracts are not material.  We also use over-the-counter natural gas swaps to hedge portions of our natural gas costs, primarily in our North American operations.

 

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

 

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.

 

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

 

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

 

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

 

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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 our business.  We have put in place security measures to protect ourselves against cyber-based attacks and disaster recovery plans for our critical systems.  However, if our information technology systems are breached, damaged, or cease to function properly due to any number of causes, such as catastrophic events, power outages, security breaches, or cyber-based attacks, and our disaster recovery plans do not effectively mitigate on a timely basis, we may encounter disruptions that could interrupt our ability to manage our operations and suffer damage to our reputation, which may adversely impact our revenues, operating results and financial condition.

 

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

 

Approximately 36 percent of our US and 48 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 51 percent of our 2014 sales were made to companies engaged in the food industry and approximately 13 percent were made to companies in both the beverage and animal nutrition markets.  Additionally, sales to the paper and corrugating industry and the brewing industry represented approximately 9 percent and 7 percent of our 2014 net sales, respectively.  If our food customers, beverage customers, brewing industry customers, paper and corrugating customers or animal feed customers were to substantially decrease their purchases, our business might be materially adversely affected.

 

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

 

If the economies of any countries 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; 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.

 

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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.  The results of our impairment testing in the fourth quarter of 2014 indicated that the estimated fair value of our Southern Cone of South America reporting unit was less than its carrying amount primarily due to the impacts on its fair value of the elongation of unfavorable financial trends, such as the impact of higher production costs and our inability to increase selling prices to a level sufficient to recover the impacts of inflation and currency devaluation.  Also, the political and economic volatility in the region and continued uncertainty in Argentina negatively impacted our earnings forecasts in the near term.  Therefore, we recorded a non-cash impairment charge of $33 million in the fourth quarter of 2014 to write-off the remaining balance of goodwill for this reporting unit.  Additionally, based on the results of the annual assessment, we concluded that as of October 1, 2014, it was more likely than not that the fair value of all other reporting units was greater than their carrying value (although the $32 million of goodwill at our Brazil reporting unit continues to be closely monitored due to recent trends experienced in this reporting unit, such as continued economic headwinds and heightened competition).

 

Even though it was determined that there was no additional long-lived asset impairment as of October 1, 2014, 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, 2015.

 

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.

 

The carrying values of deferred tax assets, which are predominantly in the US, United Kingdom, Mexico and Korea, are 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.

 

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 liabilities that could result from these risks may not always be covered by, or could exceed the limits of our insurance coverage related to product liability and food safety matters.  In addition, negative publicity caused by product liability and food safety matters may damage our reputation.  The occurrence of any of the matters described above could adversely affect our revenues and operating results.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

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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 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; Cali, Colombia; 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 $276 million in 2014.  We believe these capital expenditures will allow us to operate efficient facilities for the foreseeable future.   We currently anticipate that capital expenditures for 2015 will approximate $300 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

 

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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, 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.

 

On May 23, 2014, the defendants asked the court for leave to amend their counterclaim to add the individual sugar companies as counterclaim defendants.  The motion for leave to amend was denied by the court on August 4, 2014 and this decision is in the process of being appealed by the defendants.  On August 26, 2014, each of the Company and Tate & Lyle filed motions to disqualify the plaintiffs’ lead counsel, Squire Patton Boggs, due to a conflict of interest arising from Squire Sanders’ merger with Patton Boggs, a firm which represents each of the Company and Tate & Lyle.  In addition, on August 26, 2014, the defendants filed two separate motions for summary judgment, one on the issue of liability and the other on the issue of damages, and the plaintiffs filed a motion for summary judgment with respect to the defendants’ counterclaim.

 

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The motion to disqualify the plaintiff’s attorneys was argued before the court on both November 13 and November 25, 2014.  On February 13, 2015, the court granted the Company’s and Tate & Lyle’s motions to dismiss Squire Patton Boggs due to a conflict of interest.  The schedule for arguing the summary judgment motions and the pre-trial conference have been delayed until May 5, 2015 while the plaintiffs seek replacement counsel in the case.

 

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 also party to a large number of labor claims relating to our Brazilian operations.  We have reserved an aggregate of approximately $5 million as of December 31, 2014 in respect of these claims.  These labor claims primarily relate to dismissals, severance, health and safety, work schedules and salary adjustments.

 

We are currently subject to various other claims and suits arising in the ordinary course of business, including certain environmental proceedings and other commercial claims.  We 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 5,078 at January 31, 2015.

 

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 2013 and 2014 are shown below.

 

 

 

1st QTR

 

2nd QTR

 

3rd QTR

 

4th QTR

 

2014

 

 

 

 

 

 

 

 

 

Market prices

 

 

 

 

 

 

 

 

 

High

 

$

70.00

 

$

77.92

 

$

80.54

 

$

87.20

 

Low

 

58.28

 

65.25

 

73.10

 

69.94

 

Per share dividends declared

 

$

0.42

 

$

0.42

 

$

0.42

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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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 2014.

 

(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, 2014

 

 

 

 

847 shares

 

Nov. 1 – Nov. 30, 2014

 

 

 

 

847 shares

 

Dec. 1 – Dec. 31, 2014

 

672

 

78.45

 

672

 

5,176 shares

*

Total

 

672

 

78.45

 

672

 

 

 

 


*On December 12, 2014, the Board of Directors authorized a new stock repurchase program permitting the Company to purchase up to 5 million of its outstanding common shares from January 1, 2015 through December 31, 2019.  The Company’s previously authorized stock repurchase program permitting the purchase of up to 4 million shares has been almost fully utilized with 176 thousand shares available to be repurchased as of December 31, 2014.

 

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ITEM 6.                         SELECTED FINANCIAL DATA

 

Selected financial data is provided below.

 

(in millions, except per share amounts)

 

2014

 

2013

 

2012

 

2011

 

2010 (a)

 

Summary of operations:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

5,668

 

$

6,328

 

$

6,532

 

$

6,219

 

$

4,367

 

Net income attributable to Ingredion

 

355

(b)

396

 

428

(c)

416

(d)

169

(e)

Net earnings per common share of Ingredion:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.82

(b)

$

5.14

 

$

5.59

(c)

$

5.44

(d)

$

2.24

(e)

Diluted

 

$

4.74

(b)

$

5.05

 

$

5.47

(c)

$

5.32

(d)

$

2.20

(e)

Cash dividends declared per common share of Ingredion

 

$

1.68

 

$

1.56

 

$

0.92

 

$

0.66

 

$

0.56

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

1,423

 

$

1,394

 

$

1,427

 

$

1,176

 

$

881

 

Property, plant and equipment-net

 

2,073

 

2,156

 

2,193

 

2,156

 

2,156

 

Total assets

 

5,091

 

5,360

 

5,592

 

5,317

 

5,040

 

Long-term debt

 

1,804

 

1,717

 

1,724

 

1,801

 

1,681

 

Total debt

 

1,827

 

1,810

 

1,800

 

1,949

 

1,769

 

Total equity (f)

 

$

2,207

 

$

2,429

 

$

2,459

 

$

2,133

 

$

2,001

 

Shares outstanding, year end

 

71.3

 

74.3

 

77.0

 

75.9

 

76.0

 

Additional data:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

195

 

$

194

 

$

211

 

$

211

 

$

155

 

Capital expenditures

 

276

 

298

 

313

 

263

 

159

 

 


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

 

(b)   Includes a $33 million impairment charge ($0.44 per diluted common share) to write-off goodwill at our Southern Cone of South America reporting unit and after-tax costs of $1 million ($0.02 per diluted common share) related to the pending Penford acquisition.

 

(c)   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

 

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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 of $2 million ($0.02 per diluted common share).  See Notes 4 and 8 of the notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.

 

(d)   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.

 

(e)   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.

 

(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 in North America, South America, Asia Pacific and Europe, the Middle East and Africa (“EMEA”), and we manage and operate our businesses at a regional level.  We believe this approach provides us with a unique understanding of the cultures and product requirements in each of the geographic markets in which we operate, bringing added value to our customers.  Our ingredients are used by customers in the food, beverage, 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 work to expand our current business.  Second, we are focused on broadening our ingredient portfolio of on-trend products through internal and external business development.  Finally, we look for growth from geographic expansion as we pursue extension of our reach to new locations.  The ultimate goal of these strategies and actions is to deliver increased shareholder value.

 

Critical success factors in our business include managing our significant manufacturing costs, including costs for corn, other raw materials and utilities.  In addition, due to our global operations we are exposed to fluctuations in foreign currency exchange rates.  We use derivative financial instruments, when appropriate, for the purpose of minimizing the risks and/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”).

 

Our net income per diluted common share for 2014 declined 6 percent from 2013 due to the recording of a non-cash impairment charge of $33 million to write-off goodwill at our Southern Cone of South America business unit and $2 million of costs related to our pending acquisition of Penford Corporation.  Without these items, our diluted earnings per common share would have increased 3 percent from 2013.  Our operating income, excluding the impairment charge and acquisition costs, was up slightly from a year ago as growth in EMEA, Asia Pacific and reduced corporate expenses were substantially offset by weaker results in North America and South America.  In North America, our largest segment, operating income declined 6 percent primarily reflecting the unfavorable impact of harsh winter weather conditions on our business in the first quarter of 2014.  South America operating income fell 7 percent driven by the impact of difficult economic conditions in the Southern Cone of South America and unfavorable currency translation driven by the stronger US dollar.  Operating income grew in both Asia Pacific and EMEA reflecting volume and gross margin growth.  Given that both Asia Pacific and EMEA possess strong specialty product portfolios, we remain confident regarding future growth in these segments.

 

Our operating cash flow of $731 million for 2014 grew 18 percent from 2013.  We continue to use our operating cash flow to invest in our business and reward shareholders.  Our acquisition of Penford Corporation (see below) is expected to close in the first quarter of 2015 pending regulatory approval.  It should be immediately accretive to earnings and will enhance our specialty ingredient product portfolio.  Additionally, we continue to make strategic investments in research and development and capital for our specialty product portfolio.  During 2014 we repurchased 3.8 million of our common shares and our board of directors recently authorized the repurchase of an additional five million shares over the next five years.  We also continued to pay quarterly cash dividends to our shareholders. Our balance sheet is strong and positions us well for future strategic initiatives.

 

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Looking ahead, we anticipate that our operating income and net income will grow in 2015 compared to 2014.  In North America, we expect operating income to increase as we do not expect a repetition of the adverse weather effect that we experienced in the first quarter of 2014 and to benefit from anticipated improvement in price/product price mix.  In South America, we expect modest operating income growth driven primarily by good cost management. We anticipate slow economic growth and continued foreign exchange headwinds in that segment for 2015.  In Argentina, the political and economic environment remains volatile, challenging and uncertain, and we currently believe that our full year 2015 operating income in that country will be flat relative to 2014.  Operating income in both Asia Pacific and EMEA should continue to grow in 2015, despite currency headwinds associated with a stronger US dollar.  We anticipate that this growth will be driven primarily by improved price/product mix from our specialty ingredient product portfolio and effective cost control.

 

On October 14, 2014, we entered into a definitive agreement to acquire Penford Corporation (“Penford”), a US-based leader in specialty ingredients for food and non-food applications.  The acquisition has been approved by the boards of directors of both companies and by the shareholders of Penford.  It is subject to approval by regulators as well as to other customary closing conditions.  The purchase price is estimated to be $340 million, including the assumption of debt.  We expect to fund the acquisition of Penford with available cash and proceeds from borrowings under our revolving credit agreement.

 

Penford, headquartered in Centennial, Colorado had net sales of $444 million in fiscal year 2014.  Penford employs approximately 443 people and operates six plants in the United States, all of which manufacture specialty starches.  See Note 3 of the notes to the consolidated financial statements for additional information.

 

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.

 

2014 Compared to 2013

 

Net Income attributable to Ingredion.  Net income attributable to Ingredion for 2014 decreased to $355 million, or $4.74 per diluted common share, from $396 million, or $5.05 per diluted common share in 2013.  Our results for 2014 include an impairment charge of $33 million ($0.44 per diluted common share) to write-off goodwill at our Southern Cone of South America reporting unit (see Note 4 of the notes to the consolidated financial statements for additional information) and after-tax costs of $2 million ($0.02 per diluted common share) related to our pending acquisition of Penford.  Without the impairment charge and acquisition costs, our net income would have declined 2 percent from 2013, while our diluted earnings per share would have grown by 3 percent.  This improvement in our diluted earnings per common share was driven by the favorable impact of our share repurchases.

 

Net Sales.  Net sales for 2014 decreased to $5.67 billion from $6.33 billion in 2013, primarily reflecting reduced net sales in North America driven by lower raw material costs (primarily corn) that were reflected in our product pricing.

 

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

 

(in millions)

 

2014

 

2013

 

Increase
(Decrease)

 

% Change

 

North America

 

$

3,093

 

$

3,647

 

$

(554

)

(15

)%

South America

 

1,203

 

1,334

 

(131

)

(10

)%

Asia Pacific

 

794

 

805

 

(11

)

(1

)%

EMEA

 

578

 

542

 

36

 

7

%

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,668

 

$

6,328

 

$

(660

)

(10

)%

 

The decrease in net sales was driven by an 8 percent price/product mix decline primarily attributable to lower raw material costs and unfavorable currency translation of 4 percent due to the stronger US dollar.  A 2 percent volume increase partially offset the unfavorable impacts of the reduced selling prices and currency translation.

 

Net sales in North America decreased 15 percent, primarily reflecting a 16 percent price/product mix decline driven principally by lower raw material costs.  A 2 percent volume improvement more than offset unfavorable currency translation of 1 percent in Canada.  Net sales in South America decreased 10 percent, as a 16 percent decline attributable to weaker foreign currencies more than offset price/product mix improvement of 6 percent.  Volume in the segment was flat.  Asia Pacific net sales declined 1 percent, as a 5 percent price/product mix decline and unfavorable currency translation of 2 percent, more than offset volume growth of 6 percent.  EMEA net sales grew 7 percent reflecting price/product mix improvement of 3 percent, 3 percent volume growth and favorable currency translation of 1 percent primarily attributable to a stronger British Pound Sterling.

 

Cost of Sales.  Cost of sales for 2014 decreased 12 percent to $4.55 billion from $5.20 billion in 2013.  This reduction primarily reflects lower raw material costs and the effects of currency translation.  Gross corn costs per ton for 2014 decreased approximately 24 percent from 2013, driven by lower market prices for corn.  Currency translation caused cost of sales for 2014 to decrease approximately 4 percent from 2013, reflecting the impact of weaker foreign currencies, particularly in South America.  Our gross profit margin for 2014 was 20 percent, compared to 18 percent in 2013.  Despite reduced selling prices driven by lower corn costs, we have generally maintained per unit gross profit dollar levels, resulting in the improved gross profit margin percentages.

 

Selling, General and Administrative Expenses.  Selling, general and administrative (“SG&A”) expenses for 2014 declined to $525 million from $534 million in 2013.  The decrease was driven principally by foreign currency weakness which more than offset slightly higher compensation-related costs.  Currency translation caused SG&A expenses for 2014 to decrease approximately 4 percent from 2013.  SG&A expenses represented 47 percent of gross profit in 2014, consistent with 2013.

 

Other Income-net.  Other income-net of $24 million for 2014 increased from other income-net of $16 million in 2013.  This increase primarily reflects $7 million of income associated with a tax indemnification agreement relating to a subsidiary acquired from Akzo Nobel N.V. (“Akzo”) in 2010 and a $3 million gain from the sale of our idled plant in Kenya.  In the third quarter of 2014, we recognized a charge to our income tax provision for an unfavorable income tax audit result at the former Akzo subsidiary related to a pre-acquisition period for which we are indemnified by Akzo.  The costs incurred by the acquired subsidiary are recorded in our provision for income taxes while the reimbursement from Akzo under the indemnification agreement is recorded as other income.  The impact on our net income is zero.

 

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

 

(in millions)

 

2014

 

2013

 

Favorable
(Unfavorable)
Variance

 

Favorable
(Unfavorable)
% Change

 

North America

 

$

375

 

$

401

 

$

(26

)

(6

)%

South America

 

108

 

116

 

(8

)

(7

)%

Asia Pacific

 

103

 

97

 

6

 

6

%

EMEA

 

95

 

74

 

21

 

28

%

Corporate expenses

 

(65

)

(75

)

10

 

13

%

Write-off of impaired assets

 

(33

)

 

(33

)

nm

 

Acquisition costs

 

(2

)

 

(2

)

nm

 

Operating income

 

$

581

 

$

613

 

$

(32

)

(5

)%

 

Operating income for 2014 decreased to $581 million from $613 million in 2013.  Operating income for 2014 includes a $33 million charge to write-off impaired goodwill at our Southern Cone of South America reporting unit and $2 million of costs associated with our pending acquisition of Penford.  Without the impairment charge and acquisition costs, operating income for 2014 would have been essentially flat with 2013.  Our operating income primarily reflects earnings growth in EMEA and Asia Pacific along with reduced corporate expenses, which basically offset lower earnings in North America and South America.  Unfavorable currency translation attributable to a stronger US dollar reduced operating income by approximately $28 million from 2013.

 

North America operating income decreased 6 percent to $375 million from $401 million in 2013.  The decline primarily reflects our weak first quarter 2014 results that were negatively impacted by harsh winter weather conditions that caused higher energy, transportation and production costs.  Additionally, currency translation associated with a weaker Canadian dollar caused operating income to decrease by approximately $7 million in North America.  We are pursuing insurance recoveries for the property and business interruption loss that was caused by the harsh winter weather.  South America operating income decreased 7 percent to $108 million from $116 million in 2013.  The decrease was driven by weaker results in the Southern Cone of South America, which more than offset earnings growth in Brazil.  The operating income decline in the Southern Cone of South America primarily reflects the impact of higher production costs and our inability to increase selling prices to a level sufficient to recover the impacts of inflation and currency devaluation.  Translation effects associated with weaker South American currencies (particularly the Argentine Peso and Brazilian Real) caused operating income to decrease by approximately $18 million.  We currently anticipate that our business in South America will continue to be challenged by difficult economic conditions in 2015.  Asia Pacific operating income grew 6 percent to $103 million from $97 million in 2013.  This increase was driven principally by volume growth in our Asian business and lower corn costs in South Korea.   Unfavorable translation effects associated with weaker Asian currencies caused Asia Pacific operating income to decrease by approximately $3 million.  EMEA operating income rose 28 percent to $95 million from $74 million in 2013.  The improved earnings primarily reflect improved selling prices, volume growth and manufacturing efficiencies resulting from capital investments, particularly in Europe, and lower energy costs in Pakistan.

 

Financing Costs-net.  Financing costs-net decreased to $61 million in 2014 from $66 million in 2013.  The decline reflects a decrease in interest expense, an increase in interest income and a reduction in foreign currency transaction losses.   The reduction in interest expense reflects lower average interest rates driven by the effect of our interest rate swaps, which more than offset the impact of higher average borrowings.  The increase in interest income was driven principally by higher interest rates on our cash investments.

 

Provision for Income Taxes.  Our effective tax rate was 30.2 percent in 2014, as compared to 26.3 percent in 2013.  In the fourth quarter of 2014 we impaired goodwill in our Southern Cone subsidiaries and recorded a charge of $33 million without a tax benefit, which increased the effective tax rate by 1.8 percentage points.  We use the US dollar as the functional currency for our subsidiaries in Mexico.  Because of the decline in the value of the Mexican peso versus the US dollar, primarily late in 2014, the Mexican tax provision includes an unfavorable impact of approximately $7 million, or 1.3 percentage points in our effective tax rate, primarily associated with foreign currency transaction gains for local income tax purposes on net US dollar monetary assets held in Mexico for which there is no corresponding gain in our pre-tax income.  The tax provision also includes approximately $7 million for an unfavorable audit result at a National

 

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Starch subsidiary related to a pre-acquisition period for which we are indemnified by Akzo.  Additionally, the 2014 tax provision includes $12 million of net favorable reversals of previously unrecognized tax benefits due to the lapsing of the statute of limitations.   We have significant operations in Canada, Mexico and Thailand where the statutory tax rates are 25 percent, 30 percent and 20 percent, respectively.  In addition, our subsidiary in Brazil has a lower effective tax rate of 26 percent including local tax incentives.

 

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.  We 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 2013.  In addition, in 2013, we recognized approximately $11 million of tax benefits related to net changes in previously unrecognized tax benefits and global provision to return adjustments.

 

Without the impact of the items described above, our effective tax rates for 2014 and 2013 would have been approximately 28 percent and 30 percent, respectively.  See Note 8 of the notes to the consolidated financial statements for additional information.

 

Net Income Attributable to Non-controlling Interests.  Net income attributable to non-controlling interests was $8 million in 2014, up from $7 million in 2013.  The increase primarily reflects improved net income at our non-wholly-owned operation in Pakistan.

 

Comprehensive Income.  We recorded comprehensive income of $156 million in 2014, as compared with $288 million in 2013.  The decrease in comprehensive income primarily reflects a $75 million unfavorable variance relating mainly to the reduced funded status of our pension and postretirement benefit plans associated with lower discount rates and a revised mortality table, a $58 million unfavorable variance in the cumulative translation adjustment and our lower net income of $40 million, partially offset by a $44 million favorable variance associated with our cash-flow hedging activity.  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.

 

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 4 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.

 

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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.

 

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.  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.

 

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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, $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 the $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.  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.

 

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

 

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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 Note 8 of the notes to the consolidated financial statements for additional information.

 

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.

 

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.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At December 31, 2014, our total assets were $5.09 billion, down from $5.36 billion at December 31, 2013.  This decrease primarily reflects translation effects associated with weaker end of period foreign currencies relative to the US dollar.  Total equity decreased to $2.21 billion at December 31, 2014, from $2.43 billion at December 31, 2013.  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.  These declines more than offset the favorable impact of our 2014 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, 2014.

 

At December 31, 2014, we had $87 million of 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, 2014, we had total debt outstanding of $1.83 billion, compared to $1.81 billion at December 31, 2013.  In addition to the borrowings outstanding under the Revolving Credit Agreement, our total debt includes $350 million of 3.2 percent notes due November 1, 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 $23 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, 2014, such guarantees aggregated $214 million.  Management believes that such consolidated subsidiaries will meet their financial obligations as they become due.

 

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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 $485 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 4.1 percent and 4.4 percent for 2014 and 2013, respectively.

 

Net Cash Flows

 

A summary of operating cash flows is shown below:

 

(in millions)

 

2014

 

2013

 

Net income

 

$

363

 

$

403

 

Depreciation and amortization

 

195

 

194

 

Write-off of impaired assets

 

33

 

 

Deferred income taxes

 

(11

)

30

 

Changes in working capital

 

84

 

(57

)

Other

 

67

 

49

 

 

 

 

 

 

 

Cash provided by operations

 

$

731

 

$

619

 

 

Cash provided by operations was $731 million in 2014, as compared with $619 million in 2013.  The increase in operating cash flow for 2014 primarily reflects improved cash flow associated with working capital activities.  An increase in accounts payable and accrued liabilities associated with the timing of payments and a decrease in our margin accounts relating to commodity hedging contracts were the primary sources of our 2014 cash inflow from reduced working capital.

 

We had cash inflows of $39 million in 2014 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 cash deposits to or be entitled to receive cash from our margin accounts depending on the movement in the market price for corn.

 

Listed below are our primary investing and financing activities for 2014:

 

 

 

Sources (Uses)

 

 

 

of Cash

 

 

 

(in millions)

 

Capital expenditures

 

$

(276

)

Payments on debt

 

(213

)

Proceeds from borrowings

 

231

 

Dividends paid (including to non-controlling interests)

 

(128

)

Repurchases of common stock

 

(304

)

 

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On December 12, 2014, our board of directors declared a quarterly cash dividend of $0.42 per share of common stock.  This dividend was paid on January 26, 2015 to stockholders of record at the close of business on December 31, 2014.

 

As part of our stock repurchase program, we entered into an accelerated share repurchase agreement (“ASR”) on July 30, 2014 with an investment bank under which we repurchased $300 million of our common stock.  We paid the $300 million on August 1, 2014 and received an initial delivery of shares from the investment bank of 3,152,502 shares, representing approximately 80 percent of the shares anticipated to be repurchased based on current market prices at that time.  The initial delivery of shares resulted in an immediate reduction in the number of shares used to calculate the weighted average common shares outstanding for basic and diluted net earnings per share from the effective date of the ASR.  On December 29, 2014, the ASR was completed and we received 671,823 additional shares of our common stock bringing the total amount of repurchases to 3,824,325 shares, based upon the volume-weighted average price of $78.45 per share over the term of the share repurchase agreement.  The ASR was funded through a combination of cash on hand and utilization of the Revolving Credit Agreement.

 

On October 14, 2014, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Penford Corporation, a Washington corporation (“Penford”), Prospect Sub, Inc., a Washington corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), and the Company.  The Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement were unanimously approved by our board of directors.  The Merger Agreement provides for the merger of Merger Sub with and into Penford, on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”), with Penford continuing as the surviving corporation in the Merger.  As a result of the Merger, Penford will become a wholly-owned subsidiary of the Company.

 

Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share (a “Share”) of common stock of Penford (“Penford Common Stock”) issued and outstanding immediately prior to the Effective Time, other than (a) Shares owned by the Company or Merger Sub, or by any subsidiary of the Company or Merger Sub, immediately prior to the Effective Time and (b) Shares outstanding immediately prior to the Effective Time and held by a holder who is entitled to exercise dissenters’ rights and properly exercises dissenters’ rights under Washington law with respect to such Shares, will be converted into the right to receive $19.00 in cash per Share, without interest and subject to and reduced by the amount of any tax withholding.  As of the date of the Merger Agreement, Penford had 12,735,038 outstanding Shares and 1,429,000 Shares underlying outstanding options.   Outstanding borrowings under Penford’s revolving credit agreement will become due as a result of the Merger.  The purchase price is estimated to be $340 million, including the assumption of debt.  We expect to fund the acquisition of Penford with available cash and proceeds from borrowings under our revolving credit agreement.  The acquisition is expected to close in the first quarter of 2015 pending regulatory approval.  See Note 3 of the notes to the consolidated financial statements for additional information.

 

We currently anticipate that capital expenditures for 2015 will approximate $300 million.

 

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 considered to be permanently reinvested.  It is not practicable to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings.  We do not anticipate the need to repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements or planned acquisition of Penford.  Approximately $604 million of our total cash and cash equivalents and short-term investments of $614 million at December 31, 2014, was held by our operations outside of the United States.  We anticipate that such cash and short-term investments will be used to fund growth opportunities outside of the United States, including capital expenditures and acquisitions.  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.

 

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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 5 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 twenty-four 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, 2014, our accumulated other comprehensive loss account (“AOCI”) included $13 million of losses, net of tax of $6 million, related to these derivative instruments.   It is anticipated that these losses 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, 2014, we had foreign currency forward sales contracts with an aggregate notional amount of $150 million and foreign currency forward purchase contracts with an aggregate notional amount of $70 million that hedged transactional exposures.  The fair value of these derivative instruments is an asset of $1 million at December 31, 2014.

 

We also have foreign currency derivative instruments that hedge certain foreign currency transactional exposures and are designated as cash-flow hedges.  The amount included in AOCI relating to these hedges at December 31, 2014 was not significant.

 

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 rates less favorable than the official rate.  Argentina and other emerging markets experienced increased devaluation and volatility in 2014 and we anticipate that this trend will continue in 2015.

 

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, 2014 or 2013.

 

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In September 2014, we entered into interest rate swap agreements that effectively convert the interest rates on our 6.0 percent $200 million senior notes due April 15, 2017, our 1.8 percent $300 million senior notes due September 25, 2017 and on $200 million of our $400 million 4.625 percent senior notes due November 1, 2020, to variable rates.  Additionally, 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 the fixed coupon rate of the respective notes and to pay interest at a variable rate based on the six-month US dollar LIBOR rate plus a spread.  We have designated these interest rate swap agreements as hedges of the changes in fair value of the underlying debt obligations attributable to changes in interest rates and account for them as fair-value hedges.  The fair value of these interest rate swap agreements was $13 million at both December 31, 2014 and December 31, 2013, and is reflected in the Consolidated Balance Sheets within other assets, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligations.

 

At December 31, 2014, our accumulated other comprehensive loss account included $7 million of losses (net of tax of $4 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, 2014.  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)

 

 

 

 

 

Less

 

 

 

 

 

More

 

Contractual
Obligations

 

Note
reference

 

Total

 

than 1
year

 

2 – 3
years

 

4 – 5
years

 

than 5
years

 

Long-term debt (a) 

 

6

 

$

1,787

 

$

350

 

$

587

 

$

 

$

850

 

Interest on long-term debt

 

6

 

607

 

76

 

124

 

93

 

314

 

Operating lease obligations

 

7

 

174

 

41

 

64

 

41

 

28

 

Pension and other postretirement obligations

 

9

 

113

 

6

 

6

 

6

 

95

 

Purchase obligations (b)

 

 

 

1,404

 

344

 

324

 

242

 

494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total (c) 

 

 

 

$

4,085

 

$

817

 

$

1,105

 

$

382

 

$

1,781

 

 


(a)         Long-term debt at December 31, 2014 includes $350 million of 3.2 percent senior notes that mature November 1, 2015.  These borrowings are included in long-term debt as we have the ability and intent to refinance the notes on a long-term basis prior to the maturity date.

(b)         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.

(c)          The above table does not reflect unrecognized income tax benefits of $23 million, the timing of which is uncertain. See Note 8 of the notes to the consolidated financial statements for additional information with respect to unrecognized income tax benefits.

 

We currently anticipate that in 2015 we will make cash contributions of $1 million and $2 million to our US and non-US pension plans, respectively.  See Note 9 of the notes to the consolidated financial statements for further information with respect to our pension and postretirement benefit plans.

 

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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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Our calculations of these key financial metrics for 2014 with comparisons to the prior year are as follows:

 

Return on Capital Employed (dollars in millions)

 

2014

 

2013

 

Total equity *

 

$

2,429

 

$

2,459

 

Add:

 

 

 

 

 

Cumulative translation adjustment *

 

489

 

335

 

Share-based payments subject to redemption*

 

24

 

19

 

Total debt *

 

1,810

 

1,800

 

Less:

 

 

 

 

 

Cash and cash equivalents *

 

(574

)

(609

)

Capital employed * (a)

 

$

4,178

 

$

4,004

 

 

 

 

 

 

 

Operating income

 

$

581

 

$

613

 

Adjusted for:

 

 

 

 

 

Impairment charge

 

33

 

 

Acquisition costs

 

2

 

 

Adjusted operating income

 

$

616

 

$

613

 

Income taxes (at effective tax rates of 28.3% in 2014 and 26.3% in 2013)**

 

(174

)

(161

)

Adjusted operating income, net of tax (b)

 

$

442

 

$

452

 

 

 

 

 

 

 

Return on Capital Employed (b¸a)

 

10.6

%

11.3

%

 


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

** The effective income tax rate for 2014 excludes the impacts of an impairment charge and acquisition costs.   Including these items, the Company’s effective income tax rate for 2014 was 30.2 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)

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

As reported

 

$

520

 

$

547

 

$

157

 

$

144

 

30.2

%

26.3

%

Add back (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment charge

 

33

 

 

 

 

 

 

 

 

Acquisition costs

 

2

 

 

 

 

 

 

 

 

Adjusted-non-GAAP

 

$

555

 

$

547

 

$

157

 

$

144

 

28.3

%

26.3

%

 

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Net Debt to Adjusted EBITDA ratio (dollars in millions)

 

2014

 

2013

 

Short-term debt

 

$

23

 

$

93

 

Long-term debt

 

1,804

 

1,717

 

Less: Cash and cash equivalents

 

(580

)

(574

)

Short-term investments

 

(34

)

 

Total net debt (a)

 

$

1,213

 

$

1,236

 

Net income attributable to Ingredion

 

$

355

 

$

396

 

Add back:

 

 

 

 

 

Impairment charge

 

33

 

 

Acquisition costs

 

2

 

 

Net income attributable to non-controlling interest

 

8

 

7

 

Provision for income taxes

 

157

 

144

 

Financing costs, net of interest income of $13 and $11, respectively

 

61

 

66

 

Depreciation and amortization

 

195

 

194

 

Adjusted EBITDA (b)

 

$

811

 

$

807

 

Net Debt to Adjusted EBITDA ratio (a ÷ b)

 

1.5

 

1.5

 

 

Net Debt to Capitalization percentage (dollars in millions)

 

2014

 

2013

 

Short-term debt

 

$

23

 

$

93

 

Long-term debt

 

1,804

 

1,717

 

Less: Cash and cash equivalents

 

(580

)

(574

)

Short-term investments

 

(34

)

 

Total net debt (a)

 

$

1,213

 

$

1,236

 

Deferred income tax liabilities

 

$

180

 

$

207

 

Share-based payments subject to redemption

 

22

 

24

 

Total equity

 

2,207

 

2,429

 

Total capital

 

$

2,409

 

$

2,660

 

Total net debt and capital (b)

 

$

3,622

 

$

3,896

 

 

 

 

 

 

 

Net Debt to Capitalization percentage (a¸b)

 

33.5

%

31.7

%

 

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

 

2014

 

2013

 

Current assets

 

$

2,144

 

$

2,214

 

Less: Cash and cash equivalents

 

(580

)

(574

)

Short-term investments

 

(34

)

 

Deferred income tax assets

 

(48

)

(68

)

Adjusted current assets

 

$

1,482

 

$

1,572

 

Current liabilities

 

$

721

 

$

820

 

Less: Short-term debt

 

(23

)

(93

)

Adjusted current liabilities

 

$

698

 

$

727

 

Operating working capital (a)

 

$

784

 

$

845

 

Net sales (b)

 

$

5,668

 

$

6,328

 

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

 

13.8

%

13.4

%

 

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, 2014, 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 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 10.0 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.  While our ROCE for 2014 declined to 10.6 percent from 11.3 percent in 2013, it still remains above our target of 10.0 percent.  The decline in our ROCE for 2014 primarily reflects an increased beginning of the year capital employed base and a higher effective income tax rate.

 

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.  This ratio was 1.5 at December 31, 2014, consistent with the prior year.

 

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, 2014, our Net Debt to Capitalization percentage was 33.5 percent, up from 31.7 percent a year ago, primarily reflecting a lower capital base driven by our share repurchases, dividends on our common stock and an increase in our accumulated other comprehensive loss driven principally by unfavorable foreign currency translation, which more than offset the impact of our 2014 net income.

 

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, 2014, the metric was 13.8 percent, up from the 13.4 percent of a year ago.  The increase in the metric primarily reflects the impact of our lower net sales.

 

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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.  The carrying value of property, plant and equipment and definite-lived intangible assets at December 31, 2014 was $2.1 billion and $158 million, respectively.

 

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 and estimates of terminal or disposal values.

 

No impairment charges for property, plant and equipment or definite-lived intangible assets were recorded in 2014 or 2013.

 

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.

 

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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, 2014, 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.  We continue to closely monitor certain assets in our South America business due to the continued sluggish economy there.

 

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, 2014 was $478 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 testing goodwill for impairment, we first assesses qualitative factors in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the qualitative factors, if we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount then we do not perform the two-step impairment test.  If we conclude otherwise, then we perform the first step of the two-step impairment test as described in ASC Topic 350.  In the first step, the fair value of the reporting unit is compared to its carrying value.  If the fair value of the reporting unit exceeds the carrying value of its net assets, goodwill is not considered impaired and no further testing is required.  If the carrying value of the net assets exceeds the fair value of the reporting unit, a second step of the impairment assessment is performed in order to determine the implied fair value of a reporting unit’s goodwill.

 

In performing our impairment tests for goodwill, management makes certain estimates and judgments. These estimates and judgments include the identification of reporting units and the determination of fair values of reporting units, which management estimates using both discounted cash flow analyses and an analysis of market multiples.  Significant assumptions used in the determination of fair value for reporting units include estimates for discount and long-term net sales growth rates, in addition to operating and capital expenditure requirements.  We considered 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 have a significant impact on the fair value of the reporting units in the future.  The results of our impairment testing in the fourth quarter of 2014 indicated that the estimated fair value of our Southern Cone of South America reporting unit was less than its carrying amount primarily due to the impacts on its fair value of the elongation of unfavorable financial trends, such as the impact of higher production costs and our inability to increase selling prices to a level sufficient to recover the impacts of inflation and currency devaluation.  Also, the political and economic volatility in the region and continued uncertainty in Argentina negatively impacted our earnings forecasts in the near term.  Therefore, we recorded a non-cash impairment charge of $33 million to write-off the remaining balance of goodwill for this reporting unit.  Additionally, based on the results of the annual assessment, we concluded that as of October 1, 2014, it was more likely than not that the fair value of all other reporting units was greater than their carrying value (although the $32 million of

 

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goodwill at our Brazil reporting unit continues to be closely monitored due to recent trends experienced in this reporting unit, such as continued economic headwinds and heightened competition).

 

In performing the qualitative annual impairment assessment for other indefinite-lived intangible assets, we considered various factors in determining if it was more likely than not that the fair value of these indefinite-lived intangible assets was greater than their carrying value.  We evaluated net sales attributable to these intangible assets as compared to original projections and evaluated future projections of net sales related to these assets.  In addition, we considered market and industry conditions in the reporting units in which these intangible assets reside noting no significant changes that would result in a failed Step One impairment test as described in ASC Topic 350.  Based on the results of this qualitative assessment as of October 1, 2014, 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 had a valuation allowance of $3 million at both December 31, 2014 and 2013.

 

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.  Our liability for unrecognized tax benefits, excluding interest and penalties at December 31, 2014 and 2013 was $23 million and $34 million, respectively.

 

No taxes have been provided on approximately $2.172 billion of 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

 

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is appropriate to do so.  The effects of modifications are recognized immediately on the balance sheet, but are generally amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income.  We believe the assumptions utilized in recording our obligations under our plans, which are based on our experience, market conditions, and input from our actuaries, are reasonable. We use third-party specialists to assist management in evaluating our assumptions and estimates, as well as to appropriately measure the costs and obligations associated with our retirement benefit plans.  Had we used different estimates and assumptions with respect to these plans, our retirement benefit obligations and related expense could vary from the actual amounts recorded, and such differences could be material.  Additionally, adverse changes in investment returns earned on pension assets and discount rates used to calculate pension and postretirement benefit related liabilities or changes in required funding levels may have an unfavorable impact on future expense and cash flow.  Net periodic pension and postretirement benefit cost for all of our plans was $16 million in 2014 and $25 million in 2013.

 

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, 2014 and 2013 was 4.00 percent and 4.60 percent, respectively.  The weighted average discount rate used to determine our obligations under non-US pension plans for December 31, 2014 and 2013 was 4.47 percent and 5.60 percent, respectively.  The weighted average discount rate used to determine our obligations under our postretirement plans for December 31, 2014 and 2013 was 5.70 percent and 6.47 percent, respectively.

 

A one-percentage point decrease in the discount rates at December 31, 2014 would have increased the accumulated benefit obligation and projected benefit obligation by the following amounts (millions):

 

US Pension Plans

 

 

 

 

 

 

 

Accumulated benefit obligation

 

$

36

 

Projected benefit obligation

 

$

34

 

 

 

 

 

Non-US Pension Plans

 

 

 

 

 

 

 

Accumulated benefit obligation

 

$

40

 

Projected benefit obligation

 

$

32

 

 

 

 

 

Postretirement Plans

 

 

 

 

 

 

 

Accumulated benefit obligation

 

$

6

 

 

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.  For 2014, 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 6.45 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 2015 would increase net periodic pension cost for the US and Canada plans by less than $1 million each.

 

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Healthcare cost trend rates are used in valuing our postretirement benefit obligations and are established based upon actual health care cost trends and consultation with actuaries and benefit providers.  At December 31, 2014, the health care cost trend rate assumptions for the next year for the US, Canada and Brazil plans were 6.70 percent, 7.05 percent and 8.66 percent, respectively.

 

The sensitivities of service cost and interest cost and year-end benefit obligations to changes in healthcare cost trend rates (both initial and ultimate rates) for the postretirement benefit plans as of December 31, 2014 are as follows:

 

 

 

2014

 

One-percentage point increase in trend rates:

 

 

 

·  Increase in service cost and interest cost components

 

$

1 million

 

 

 

 

 

·  Increase in year-end benefit obligations

 

$

4 million

 

 

 

 

 

One-percentage point decrease in trend rates:

 

 

 

·  Decrease in service cost and interest cost components

 

$

1 million

 

 

 

 

 

·  Decrease in year-end benefit obligations

 

$

3 million

 

 

See Note 9 of the notes to the consolidated financial statements for more information related to our benefit plans.

 

New Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.  This standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period.  The standard will allow various transition approaches upon adoption.  We are assessing the impacts of this new standard; however the adoption of the guidance in this Update is not expected to have a material impact on our Consolidated Financial Statements.

 

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.

 

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Forward-looking statements include, among other things, any statements regarding the Company’s prospects or future financial condition, earnings, revenues, tax rates, capital expenditures, expenses or other financial items, any statements concerning the Company’s prospects or future operations, including management’s plans or strategies and objectives therefor and any assumptions, expectations or beliefs underlying the foregoing.

 

These statements can sometimes be identified by the use of forward looking words such as “may,” “will,” “should,” “anticipate,” “assume”, “believe,” “plan,” “project,” “estimate,” “expect,” “intend,” “continue,” “pro forma,” “forecast,” “outlook” or other similar expressions or the negative thereof. All statements other than statements of historical facts in this report or referred to in or incorporated by reference into this report are “forward-looking statements.”

 

These statements are based on current circumstances or expectations, but are subject to certain inherent risks and uncertainties, many of which are difficult to predict and are beyond our control. Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, 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; 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.  Factors relating to the pending acquisition of Penford Corporation that could cause actual results and developments to differ from expectations include:  required regulatory approvals may not be obtained in a timely manner, if at all; the pending acquisition may not be consummated in a timely manner or at all; the anticipated benefits of the pending acquisition, including synergies, may not be realized; and the integration of Penford’s operations with those of Ingredion may be materially delayed or may be more costly or difficult than expected.

 

Our forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement as a result of new information or future events or developments. If we do update or correct one or more of these statements, investors and others should not conclude that we will make additional updates or corrections.  For a further description of these and other risks, see 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, 2014, approximately 36 percent or $650 million of our borrowings are fixed rate debt and 64 percent or approximately $1.16 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, 2014.  A hypothetical increase of 1 percentage point in the weighted average floating interest rate would

 

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increase our annual interest expense by approximately $12 million.  See Note 6 of the notes to the consolidated financial statements entitled “Financing Arrangements” for further information.

 

At December 31, 2014 and 2013, the carrying and fair values of long-term debt were as follows:

 

 

 

2014

 

2013

 

(in millions)

 

Carrying
amount

 

Fair
 value

 

Carrying
amount

 

Fair
 value

 

 

 

 

 

 

 

 

 

 

 

4.625% senior notes, due November 1, 2020

 

$

399

 

$

427

 

$

399

 

$

420

 

3.2% senior notes, due November 1, 2015

 

350

 

356

 

350

 

363

 

1.8% senior notes, due September 25, 2017

 

299

 

302

 

298

 

296

 

6.625% senior notes, due April 15, 2037

 

256

 

312

 

257

 

281

 

6.0% senior notes, due April 15, 2017

 

200

 

220

 

200

 

219

 

5.62% senior notes, due March 25, 2020

 

200

 

222

 

200

 

221

 

U.S. revolving credit facility due October 22, 2017

 

87

 

87

 

 

 

Fair value adjustment related to hedged fixed rate debt instrument

 

13

 

13

 

13

 

13

 

Total long-term debt

 

$

1,804

 

$

1,939

 

$

1,717

 

$

1,813

 

 

A hypothetical change of 1 percentage point in interest rates would change the fair value of our fixed rate debt at December 31, 2014 by approximately $87 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 a significant effect on our consolidated financial statements.

 

In September 2014, we entered into interest rate swap agreements that effectively convert the interest rates on our 6.0 percent $200 million senior notes due April 15, 2017, our 1.8 percent $300 million senior notes due September 25, 2017 and on $200 million of our $400 million 4.625 percent senior notes due November 1, 2020, to variable rates.  Additionally, 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 the fixed coupon rate of the respective notes and to pay interest at a variable rate based on the six-month US dollar LIBOR rate plus a spread.  We have designated these interest rate swap agreements as hedges of the changes in fair value of the underlying debt obligations attributable to changes in interest rates and account for them as fair-value hedges.  The fair value of these interest rate swap agreements approximated $13 million at December 31, 2014 and is reflected in the Consolidated Balance Sheets within other assets, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligations.

 

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,

 

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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 11 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 generally over the following twelve to twenty-four months, primarily in our North American operations.

 

At December 31, 2014, we had outstanding futures and option contracts that hedged approximately 93 million bushels of forecasted corn purchases and 4 million pounds of soybean oil.  We are unable to directly hedge price risk related to co-product sales; however, we occasionally enter into hedges of soybean oil (a competing product to corn oil) in order to mitigate the price risk of corn oil sales.  Also at December 31, 2014, we had outstanding swap and option contracts that hedged approximately 14 million mmbtu’s of forecasted natural gas purchases.  Based on our overall commodity hedge position at December 31, 2014, 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 $28 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.

 

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 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 rates less favorable than the official rate.  Argentina and other emerging markets experienced increased devaluation and volatility in 2014 and we anticipate that this trend will continue in 2015.

 

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, 2014, we estimate that a hypothetical 10 percent decline in the value of the USD would have resulted in a transactional foreign exchange gain of less than $1 million.  At December 31, 2014, our accumulated other comprehensive loss account included in the equity section of our consolidated balance sheet includes a cumulative translation loss of $701 million.  The aggregate net assets of our foreign subsidiaries where the local currency is the functional currency approximated $1.6 billion at December 31, 2014.  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 $181 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

52

 

 

Consolidated Statements of Income

54

 

 

Consolidated Statements of Comprehensive Income

55

 

 

Consolidated Balance Sheets

56

 

 

Consolidated Statements of Equity and Redeemable Equity

57

 

 

Consolidated Statements of Cash Flows

58

 

 

Notes to the Consolidated Financial Statements

59

 

 

Quarterly Financial Data (Unaudited)

93

 

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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 (the Company) as of December 31, 2014 and 2013, 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, 2014. We also have audited the Company’s internal control over financial reporting as of December 31, 2014, 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, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, 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, 2014, 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 20, 2015

 

 

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INGREDION INCORPORATED

Consolidated Statements of Income

 

Years Ended December 31,

(in millions, except per share amounts)

 

2014

 

2013

 

2012

 

Net sales before shipping and handling costs

 

$

5,998

 

$

6,653

 

$

6,868

 

Less - shipping and handling costs

 

330

 

325

 

336

 

Net sales

 

5,668

 

6,328

 

6,532

 

Cost of sales

 

4,553

 

5,197

 

5,294

 

Gross profit

 

1,115

 

1,131

 

1,238

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

525

 

534

 

556

 

Other (income) - net

 

(24

)

(16

)

(22

)

Impairment/restructuring charges

 

33

 

 

36

 

 

 

534

 

518

 

570

 

 

 

 

 

 

 

 

 

Operating income

 

581

 

613

 

668

 

 

 

 

 

 

 

 

 

Financing costs-net

 

61

 

66

 

67

 

 

 

 

 

 

 

 

 

Income before income taxes

 

520

 

547

 

601

 

Provision for income taxes

 

157

 

144

 

167

 

Net income

 

363

 

403

 

434

 

Less - Net income attributable to non-controlling interests

 

8

 

7

 

6

 

Net income attributable to Ingredion

 

$

355

 

$

396

 

$

428

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

73.6

 

77.0

 

76.5

 

Diluted

 

74.9

 

78.3

 

78.2

 

 

 

 

 

 

 

 

 

Earnings per common share of Ingredion:

 

 

 

 

 

 

 

Basic

 

$

4.82

 

$

5.14

 

$

5.59

 

Diluted

 

4.74

 

5.05

 

5.47

 

 

See notes to the consolidated financial statements.

 

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INGREDION INCORPORATED

Consolidated Statements of Comprehensive Income

 

Years ended December 31,

 

 

 

 

 

 

 

(in millions)

 

2014

 

2013

 

2012

 

Net income

 

$

363

 

$

403

 

$

434

 

Other comprehensive income:

 

 

 

 

 

 

 

Gains (losses) on cash-flow hedges, net of income tax effect of $12, $29 and $25, respectively

 

(29

)

(64

)

43

 

Reclassification adjustment for losses (gains) on cash-flow hedges included in net income, net of income tax effect of $23, $19 and $15, respectively

 

50

 

41

 

(25

)

Actuarial gains (losses) on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $5, $32 and $27, respectively

 

(12

)

63

 

(56

)

Losses related to pension and other postretirement obligations reclassified to earnings, net of income tax effect of $1, $3 and $2, respectively

 

4

 

5

 

5

 

Unrealized gain on investment, net of income tax effect

 

 

1

 

 

Currency translation adjustment

 

(212

)

(154

)

(29

)

Comprehensive income

 

$

164

 

$

295

 

$

372

 

Less: Comprehensive income attributable to non-controlling interests

 

8

 

7

 

6

 

Comprehensive income attributable to Ingredion

 

$

156

 

$

288

 

$

366

 

 

See notes to the consolidated financial statements.

 

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INGREDION INCORPORATED

Consolidated Balance Sheets

 

As of December 31,

 

 

 

 

 

(in millions, except share and per share amounts)

 

2014

 

2013

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

580

 

$

574

 

Short-term investments

 

34

 

 

Accounts receivable — net

 

762

 

832

 

Inventories

 

699

 

723

 

Prepaid expenses

 

21

 

17

 

Deferred income tax assets

 

48

 

68

 

Total current assets

 

2,144

 

2,214

 

Property, plant and equipment, at cost

 

 

 

 

 

Land

 

170

 

173

 

Buildings

 

695

 

696

 

Machinery and equipment

 

4,021

 

4,063

 

 

 

4,886

 

4,932

 

Less: accumulated depreciation

 

(2,813

)