ingr_Current Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q


 

(Mark One)

 

 

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

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

or

 

 

 

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

 

For the transition period from                 to                   

 

COMMISSION FILE NUMBER 1-13397

 

Ingredion Incorporated

(Exact name of Registrant as specified in its charter)

 

DELAWARE

(State or other jurisdiction of incorporation or organization)

 

22-3514823

(I.R.S. Employer Identification Number)

 

 

 

 

5 WESTBROOK CORPORATE CENTER

WESTCHESTER, ILLINOIS

 

60154

(Address of principal executive offices)

 

(Zip Code)

 

(708) 551-2600

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

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

 

Smaller reporting company ☐

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

 

 

CLASS

 

OUTSTANDING AT APRIL 30, 2018

Common Stock, $.01 par value

 

72,242,279 shares

 

 

 

 


 

PART I FINANCIAL INFORMATION

 

ITEM 1

 

FINANCIAL STATEMENTS

Ingredion Incorporated (“Ingredion”)

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

March 31, 

 

(in millions, except per share amounts)

    

2018

    

2017

 

Net sales before shipping and handling costs

  

$

1,581

 

$

1,552

 

Less: shipping and handling costs

 

 

112

 

 

99

 

Net sales

 

 

1,469

 

 

1,453

 

Cost of sales

 

 

1,115

 

 

1,102

 

Gross profit

 

 

354

 

 

351

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

156

 

 

150

 

Other income, net

 

 

(2)

 

 

(2)

 

Restructuring/impairment charges

 

 

 3

 

 

10

 

 

 

 

 

 

 

 

 

Operating income

 

 

197

 

 

193

 

 

 

 

 

 

 

 

 

Financing costs, net

 

 

16

 

 

21

 

Other, non-operating income

 

 

(1)

 

 

(2)

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

182

 

 

174

 

Provision for income taxes

 

 

39

 

 

47

 

Net income

 

 

143

 

 

127

 

Less: Net income attributable to non-controlling interests

 

 

 3

 

 

 3

 

Net income attributable to Ingredion

 

$

140

 

$

124

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

72.3

 

 

72.2

 

Diluted

 

 

73.6

 

 

73.7

 

 

 

 

 

 

 

 

 

Earnings per common share of Ingredion:

 

 

 

 

 

 

 

Basic

 

$

1.94

 

$

1.72

 

Diluted

 

 

1.90

 

 

1.68

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

2


 

PART I FINANCIAL INFORMATION

 

ITEM 1

 

FINANCIAL STATEMENTS

Ingredion Incorporated (“Ingredion”)

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

March 31, 

 

(in millions)

    

2018

    

2017

 

Net income

  

$

143

 

$

127

 

Other comprehensive income:

 

 

 

 

 

 

 

Gains on cash flow hedges, net of income tax effect of $5 and $3, respectively

 

 

17

 

 

 5

 

Losses on cash flow hedges reclassified to earnings, net of income tax effect of $1 and $1, respectively

 

 

 3

 

 

 3

 

Actuarial losses on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $ —

 

 

(1)

 

 

 —

 

Unrealized gains on investments, net of income tax effect of $ —

 

 

 1

 

 

 —

 

Currency translation adjustment

 

 

21

 

 

40

 

Comprehensive income

 

 

184

 

 

175

 

Less: Comprehensive income attributable to non-controlling interests

 

 

 1

 

 

 3

 

Comprehensive income attributable to Ingredion

 

$

183

 

$

172

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

 

3


 

PART I FINANCIAL INFORMATION

 

ITEM 1

 

FINANCIAL STATEMENTS

Ingredion Incorporated (“Ingredion”)

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(in millions, except share and per share amounts)

    

2018

    

2017

 

 

 

(Unaudited)

 

 

 

 

Assets

  

 

 

  

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

401

 

$

595

 

Short-term investments

 

 

 6

 

 

 9

 

Accounts receivable, net

 

 

1,012

 

 

961

 

Inventories

 

 

844

 

 

823

 

Prepaid expenses

 

 

29

 

 

27

 

Total current assets

 

 

2,292

 

 

2,415

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $3,030 and $2,991, respectively

 

 

2,236

 

 

2,217

 

Goodwill

 

 

807

 

 

803

 

Other intangible assets, net of accumulated amortization of $147 and $139, respectively

 

 

488

 

 

493

 

Deferred income tax assets

 

 

 9

 

 

 9

 

Other assets

 

 

143

 

 

143

 

Total assets

 

$

5,975

 

$

6,080

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term borrowings

 

$

140

 

$

120

 

Accounts payable and accrued liabilities

 

 

769

 

 

837

 

Total current liabilities

 

 

909

 

 

957

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

253

 

 

227

 

Long-term debt

 

 

1,512

 

 

1,744

 

Deferred income tax liabilities

 

 

210

 

 

199

 

Share-based payments subject to redemption

 

 

27

 

 

36

 

 

 

 

 

 

 

 

 

Ingredion stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock — authorized 25,000,000 shares — $0.01 par value, none issued

 

 

 —

 

 

 

Common stock — authorized 200,000,000 shares — $0.01 par value, 77,810,875 issued at March 31, 2018 and December 31, 2017, respectively

 

 

 1

 

 

 1

 

Additional paid-in capital

 

 

1,132

 

 

1,138

 

Less: Treasury stock (common stock: 5,570,474 and 5,815,904 shares at March 31, 2018 and December 31, 2017, respectively) at cost

 

 

(476)

 

 

(494)

 

Accumulated other comprehensive loss

 

 

(972)

 

 

(1,013)

 

Retained earnings

 

 

3,355

 

 

3,259

 

Total Ingredion stockholders’ equity

 

 

3,040

 

 

2,891

 

Non-controlling interests

 

 

24

 

 

26

 

Total equity

 

 

3,064

 

 

2,917

 

Total liabilities and equity

 

$

5,975

 

$

6,080

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

4


 

PART I FINANCIAL INFORMATION

 

ITEM 1

 

FINANCIAL STATEMENTS

Ingredion Incorporated (“Ingredion”)

Condensed Consolidated Statements of Equity and Redeemable Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Equity

 

Share-based

 

 

 

 

 

 

Additional

 

 

 

 

Accumulated Other

 

 

 

 

Non-

 

Payments

 

 

 

Common

 

Paid-In

 

Treasury

 

Comprehensive

 

Retained

 

Controlling

 

Subject to

 

(in millions)

    

Stock

    

Capital

    

Stock

    

Loss

    

Earnings

    

Interests

    

Redemption

 

Balance, December 31, 2017

 

$

 1

 

$

1,138

 

$

(494)

 

$

(1,013)

 

$

3,259

 

$

26

 

$

36

 

Net income attributable to Ingredion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

140

 

 

 

 

 

 

 

Net income attributable to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 3

 

 

 

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44)

 

 

(3)

 

 

 

 

Share-based compensation, net of issuance

 

 

 

 

 

(6)

 

 

18

 

 

 

 

 

 

 

 

 

 

 

(9)

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

41

 

 

 

 

 

(2)

 

 

 

 

Balance, March 31, 2018

 

$

 1

 

$

1,132

 

$

(476)

 

$

(972)

 

$

3,355

 

$

24

 

$

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Equity

 

Share-based

 

 

 

 

 

 

Additional

 

 

 

 

Accumulated Other

 

 

 

 

Non-

 

Payments

 

 

 

Common

 

Paid-In

 

Treasury

 

Comprehensive

 

Retained

 

Controlling

 

Subject to

 

(in millions)

    

Stock

    

Capital

    

Stock

    

Loss

    

Earnings

    

Interests

    

Redemption

 

Balance, December 31, 2016

 

$

 1

 

$

1,149

 

$

(413)

 

$

(1,071)

 

$

2,899

 

$

30

 

$

30

 

Net income attributable to Ingredion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

124

 

 

 

 

 

 

 

Net income attributable to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 3

 

 

 

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36)

 

 

(8)

 

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

(123)

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation, net of issuance

 

 

 

 

 

(10)

 

 

16

 

 

 

 

 

 

 

 

 

 

 

(6)

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

48

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2017

 

$

 1

 

$

1,139

 

$

(520)

 

$

(1,023)

 

$

2,987

 

$

25

 

$

24

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

5


 

PART I FINANCIAL INFORMATION

 

ITEM 1

 

FINANCIAL STATEMENTS

 

Ingredion Incorporated (“Ingredion”)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(in millions)

    

2018

    

2017

 

Cash provided by operating activities

 

 

 

 

 

 

 

Net income

 

$

143

 

$

127

 

Non-cash charges to net income:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

54

 

 

51

 

Mechanical stores expense

 

 

15

 

 

15

 

Deferred income taxes

 

 

 8

 

 

(4)

 

Charge for fair value markup of acquired inventory

 

 

 —

 

 

 5

 

Other

 

 

 8

 

 

12

 

Changes in working capital:

 

 

 

 

 

 

 

Accounts receivable and prepaid expenses

 

 

(56)

 

 

12

 

Inventories

 

 

(21)

 

 

(40)

 

Accounts payable and accrued liabilities

 

 

(57)

 

 

(48)

 

Margin accounts

 

 

16

 

 

 6

 

Other

 

 

40

 

 

(5)

 

Cash provided by operating activities

 

 

150

 

 

131

 

 

 

 

 

 

 

 

 

Cash used for investing activities

 

 

 

 

 

 

 

Capital expenditures and mechanical stores purchases, net of proceeds on disposals

 

 

(95)

 

 

(72)

 

Payments for acquisitions

 

 

 —

 

 

(13)

 

Short-term investments

 

 

 3

 

 

(8)

 

Other

 

 

 6

 

 

 —

 

Cash used for investing activities

 

 

(86)

 

 

(93)

 

 

 

 

 

 

 

 

 

Cash used for financing activities

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

46

 

 

108

 

Payments on debt

 

 

(258)

 

 

(55)

 

Repurchases of common stock

 

 

 —

 

 

(123)

 

Issuances of common stock for share-based compensation, net of settlements

 

 

(3)

 

 

(7)

 

Dividends paid, including to non-controlling interests

  

 

(46)

  

 

(44)

 

Cash used for financing activities

 

 

(261)

 

 

(121)

 

 

 

 

 

 

 

 

 

Effects of foreign exchange rate changes on cash

 

 

 3

 

 

 6

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(194)

 

 

(77)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

595

 

 

512

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

401

 

$

435

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

6


 

 

INGREDION INCORPORATED (“Ingredion”)

Notes to Condensed Consolidated Financial Statements

 

1.      Interim Financial Statements

 

References to the “Company” are to Ingredion Incorporated (“Ingredion”) and its consolidated subsidiaries. These statements should be read in conjunction with the consolidated financial statements and the related notes to those statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

The unaudited Condensed Consolidated Financial Statements included herein were prepared by management on the same basis as the Company’s audited Consolidated Financial Statements for the year ended December 31, 2017 and reflect all adjustments (consisting solely of normal recurring items unless otherwise noted) which are, in the opinion of management, necessary for the fair presentation of results of operations and cash flows for the interim periods ended March 31, 2018 and 2017, and the financial position of the Company as of March 31, 2018. The results for the interim periods are not necessarily indicative of the results expected for the full years.

 

2.      Recently Adopted and New Accounting Standards

 

Recently Adopted Accounting Standards

 

ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606):  

 

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 introduced a 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. The ASU requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The FASB also issued additional ASUs to provide further updates and clarification to this Update, including ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period.

 

As of January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”). The Company performed detailed procedures to review its revenue contracts held with its customers and did not identify any changes to the nature, amount, timing or uncertainty of revenue and cash flows arising from the contracts with customers as a result of the new revenue standard.

 

The new revenue standard requires the Company to recognize revenue under the core principle to depict the transfer of products to customers in an amount reflecting the consideration the Company expects to receive. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

 

The Company identified customer purchase orders, which in some cases are governed by a master sales agreement, as the contracts with its customers. For each contract, the Company considers the transfer of products, each of which is distinct, to be the identified performance obligation. In determining the transaction price for the performance obligation, the Company evaluates whether the price is subject to adjustment to determine the consideration to which the Company expects to be entitled. The pricing model can be fixed or variable within the contract. The variable pricing model is based on historical commodity pricing and is determinable prior to completion of the performance obligation. Additionally, the Company has certain sales adjustments for volume incentive discounts and other discount arrangements that reduce the transaction price. The reduction of transaction price is estimated using the expected value method based on an analysis of historical volume incentives or discounts, over a period of time considered adequate to account for current pricing and business trends. Historically, actual volume incentives and discounts relative to those estimated and included when determining the transaction price have not materially differed. The product price as specified in the contract, net of

7


 

 

any discounts, is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Payment is received shortly after the performance obligation is satisfied, therefore, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component.

 

Revenue is recognized when the Company’s performance obligation is satisfied and control is transferred to the customer, which occurs at a point in time, either upon delivery to an agreed upon location or to the customer. Further, in determining whether control has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer.

 

Historically, the Company included warehousing costs as a reduction of net sales before shipping and handling costs. In connection with the adoption of the new revenue standard, the Company determined these warehousing costs which were previously included as a reduction in net sales before shipping and handling costs are more appropriately classified as fulfillment activities.  Therefore, upon adoption of the new revenue standard, the Company elected to include these costs within shipping and handling costs. The Company has elected to continue to classify shipping and handling costs as a reduction of net sales after implementing the new revenue standard consistent with its historical presentation.  The Company has elected to make this adjustment on a retrospective basis, resulting in the change to the Condensed Consolidated Statements of Income shown below.  The Company notes that the reclassification does not change reported net sales. 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

(in millions)

 

As Reported

 

As Adjusted

 

Condensed Consolidated Statements of Income:

 

 

 

 

 

 

 

Net sales before shipping and handling costs

 

$

1,537

 

$

1,552

 

Less: shipping and handling costs

 

 

84

 

 

99

 

Net sales

 

$

1,453

 

$

1,453

 

 

The Company initially intended to use the modified retrospective method to adopt the new standard, however, with the implementation of the reclassification of warehousing costs to shipping and handling costs, the Company has elected to use the full retrospective method, which requires the restatement of all previously presented financial results. The adoption of the new standard did not result in any retrospective changes to the Company’s Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Equity and Redeemable Equity, or the Condensed Consolidated Statements of Cash Flows.  For detailed information about the Company’s revenue recognition refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements.

 

ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715):

 

In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This Update requires an entity to change the classification of the net periodic benefit cost for pension and postretirement plans within the statement of income by eliminating the ability to net all of the components of the costs together within operating income. The Update requires the service cost component to continue to be presented within operating income, classified within either cost of sales or operating expenses depending on the employees covered within the plan. The remaining components of the net periodic benefit cost, however, must be presented in the statement of income as a non-operating income (loss) below operating income. The Update is effective for annual periods beginning after December 15, 2017, with early adoption permitted only within the first interim period for public entities.

 

As of January 1, 2018, the Company adopted the amendments to ASC 715. The Company retrospectively adopted the presentation of service cost separate from the other components of net periodic costs for all periods presented. The interest cost, expected return on assets, amortization of prior service costs, net remeasurement, and other costs have been reclassified from cost of sales and operating expenses to other, non-operating income. The Company elected to apply the practical expedient which allows it to reclassify amounts disclosed previously in the retirement benefits note as the basis for applying retrospective presentation for comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. On a prospective basis, the other components of net periodic benefit costs will not be included in amounts capitalized in inventory.

 

8


 

 

The adoption of the new standard did not result in any retrospective changes to the Company’s Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Equity and Redeemable Equity, or the Condensed Consolidated Statements of Cash Flows. The adoption of the new standard impacted the presentation of the Company’s previously reported results in the Condensed Consolidated Statements of Income and Note 6 of the Condensed Consolidated Financial Statements as follows:

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 2017

 

(in millions)

 

As Reported

 

As Adjusted

 

Condensed Consolidated Statements of Income:

 

 

 

 

 

 

 

Cost of sales

 

$

1,101

 

$

1,102

 

Gross profit

 

 

352

 

 

351

 

Operating expenses

 

 

149

 

 

150

 

Operating income

 

 

195

 

 

193

 

Other, non-operating income

 

 

 —

 

 

(2)

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 2017

 

(in millions)

 

As Reported

 

As Adjusted

 

Operating income:

 

 

 

 

 

 

 

North America

 

$

160

 

$

158

 

South America

 

 

14

 

 

15

 

Asia Pacific

 

 

30

 

 

30

 

EMEA

 

 

28

 

 

28

 

Corporate

 

 

(20)

 

 

(21)

 

Subtotal

 

 

212

 

 

210

 

Total operating income

 

$

195

 

$

193

 

 

New Accounting Standards

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. This Update increases the transparency and comparability of organizations by recognizing lease assets and lease liabilities on the balance sheet for leases longer than 12 months and disclosing key information about leasing arrangements. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed. This Update is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The Company currently plans to adopt the standard as of the effective date. Adoption will require a modified retrospective approach for the transition. The Company expects the adoption of the guidance in this Update to have a material impact on its Consolidated Balance Sheets as operating leases will be recognized both as assets and liabilities on the Consolidated Balance Sheets. The Company is in process of quantifying the magnitude of these changes and assessing an implementation approach for accounting for these changes.    

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This Update simplifies the subsequent measurement of goodwill as the Update eliminates Step 2 from the goodwill impairment test. Instead, under the Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized not to exceed the total amount of goodwill allocated to that reporting unit. This Update is effective for annual periods beginning after December 15, 2019, with early adoption permitted.    

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This Update modifies accounting guidance for hedge accounting by making more hedge strategies eligible for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess ineffectiveness. The intent is to simplify the application of hedge accounting and increase transparency of information about an entity’s risk management activities. The amended guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The Company is in the process of assessing the effects of these updates including potential changes to existing hedging arrangements, as well as the implementation approach for accounting for these changes. The Company does not intend to early adopt this standard.

 

 

9


 

 

3.      Acquisitions

 

On March 9, 2017, the Company completed its acquisition of Sun Flour Industry Co., Ltd. (“Sun Flour”) in Thailand for $18 million. As of March 31, 2018, the Company has paid $16 million in cash and recorded $2 million in accrued liabilities for deferred payments due to the previous owner. The Company funded the acquisition primarily with cash on-hand. The acquisition of Sun Flour added a fourth manufacturing facility to the Company’s operations in Thailand. Sun Flour produces rice-based ingredients used primarily in the food industry. The results of the acquired operation are included in the Company’s consolidated results from the acquisition date forward within the Asia Pacific business segment, and $14 million of goodwill was allocated to that segment. 

The Company has finalized the purchase price allocation for all areas for the Sun Flour acquisition.  The finalization of goodwill and intangible assets did not have a significant impact on previously estimated amounts. The acquisition of Sun Flour added $15 million to goodwill and identifiable intangible assets and $3 million to net tangible assets as of the acquisition date.

Goodwill represents the amount by which the purchase price exceeds the estimated fair value of the net assets acquired. The goodwill results from synergies and other operational benefits expected to be derived from the acquisitions. The goodwill related to Sun Flour is not tax deductible.

Pro-forma results of operations for the acquisition made in 2017 has not been presented as the effect of the acquisition would not be material to the Company’s results of operations for any periods presented.

The Company incurred immaterial pre-tax acquisition and integration costs for the three months ended March 31, 2018. The Company incurred $2 million of pre-tax acquisition and integration costs for the three months ended March 31, 2017 associated with its recent acquisitions.

 

4.      Revenue Recognition

 

The Company applies the provisions of ASC 606-10, Revenue from Contracts with Customers. The Company recognizes revenue under the core principle to depict the transfer of products to customers in an amount reflecting the consideration the Company expects to receive. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

 

The Company identified customer purchase orders, which in some cases are governed by a master sales agreement, as the contracts with its customers. For each contract, the Company considers the transfer of products, each of which is distinct, to be the identified performance obligation. In determining the transaction price for the performance obligation, the Company evaluates whether the price is subject to adjustment to determine the consideration to which the Company expects to be entitled. The pricing model can be fixed or variable within the contract. The variable pricing model is based on historical commodity pricing and is determinable prior to completion of the performance obligation. Additionally, the Company has certain sales adjustments for volume incentive discounts and other discount arrangements that reduce the transaction price. The reduction of transaction price is estimated using the expected value method based on an analysis of historical volume incentives or discounts, over a period of time considered adequate to account for current pricing and business trends. Historically, actual volume incentives and discounts relative to those estimated and included when determining the transaction price have not materially differed. Volume incentives and discounts are accrued at the satisfaction of the performance obligation and accounted for in accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. These amounts are not significant as of March 31, 2018 and December 31, 2017. The product price as specified in the contract, net of any discounts, is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Payment is received shortly after the performance obligation is satisfied, therefore, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component.

 

Revenue is recognized when the Company’s performance obligation is satisfied and control is transferred to the customer, which occurs at a point in time, either upon delivery to an agreed upon location or to the customer. Further, in determining whether control has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer.

 

10


 

 

Shipping and handling activities related to contracts with customers represent fulfillment costs and are presented as a reduction of net sales. Taxes assessed by governmental authorities and collected from customers are accounted for on a net basis and excluded from revenues.  The Company applies a practical expedient to expense costs to obtain a contract as incurred as most contracts are one year or less.  These costs are comprised primarily from the Company’s internal sales force compensation program. Under the terms of these programs these are generally earned and the costs are recognized at the time the revenue is recognized. 

 

From time to time the Company may enter into long term contracts with its customers. Historically, the contracts entered into by the Company do not result in significant contract assets or liabilities.  Any such arrangements are accounted for in other assets or accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets.  There were no significant contract assets or liabilities as of March 31, 2018 and December 31, 2017.

 

The Company is principally engaged in the production and sale of starches and sweeteners for a wide range of industries, and is managed geographically on a regional basis. The Company’s operations are classified into four reportable business segments: North America, South America, Asia Pacific and Europe, Middle East and Africa (“EMEA”).  The nature, amount, timing and uncertainty of the Company’s net sales are managed by the Company primarily based on its geographic segments. Each region’s product sales are unique to each region and have unique risks.

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

 

 

March 31, 

 

(in millions)

    

2018

    

2017

    

Net sales to unaffiliated customers:

 

 

 

 

 

 

 

North America

 

$

874

 

$

881

 

South America

 

 

249

 

 

255

 

Asia Pacific

 

 

194

 

 

179

 

EMEA

 

 

152

 

 

138

 

Total

 

$

1,469

 

$

1,453

 

 

Additionally, the nature, amount, timing and uncertainty of the Company’s net sales are managed based on its global customer mix.  The Company sells to customers in a broad range of industries and evaluates the economic factors impacting its net sales through consideration of the industries into which its products are sold.  Four distinct industries it focuses on are food, beverage, brewing (collectively, food & beverage ingredients) and animal nutrition.  The following table, which is gathered using customer industry classifications, disaggregates the Company’s net sales by industry served:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(in millions)

    

2018

    

2017

 

Food

 

$

792

 

$

764

 

Beverage

 

 

167

 

 

162

 

Brewing

 

 

103

 

 

112

 

Food and Beverage Ingredients

 

 

1,062

 

 

1,038

 

 

 

 

 

 

 

 

 

Animal Nutrition

 

 

150

 

 

149

 

Other

 

 

257

 

 

266

 

Total Net sales

 

$

1,469

 

$

1,453

 

 

 

 

5.      Impairment and Restructuring Charges

 

For the three months ended March 31, 2018 and 2017, the Company recorded $3 million and $10 million of pre-tax restructuring charges, respectively. The 2018 charges include $2 million of other costs related to the North America Finance Transformation initiative and $1 million of other restructuring costs related to the leaf extraction process in Brazil, both of which were announced in 2017. The Company expects to incur between $1 million and $2 million of additional other costs for the remainder of 2018 related to the North America Finance Transformation initiative.

 

For the three months ended March 31, 2017, the Company recorded total pre-tax restructuring-related charges in Argentina of $11 million for employee-related severance and other costs related to an organizational restructuring effort. 

11


 

 

Additionally, the Company recorded a $1 million reduction in expected employee severance-related charges associated with the execution of global information technology (“IT”) outsourcing contracts.

 

A summary of the Company’s severance accrual as of March 31, 2018 is as follows (in millions):

 

 

 

 

 

 

Balance in severance accrual as of December 31, 2017

    

$

11

 

Payments made to terminated employees

 

 

(3)

 

Balance in severance accrual as of March 31, 2018

 

$

 8

 

 

Of the $8 million severance accrual as of March 31, 2018, $7  million is expected to be paid in the next 12 months.

 

 

 

 

 

 

 

 

 

 

6.      Segment Information

 

The Company is principally engaged in the production and sale of starches and sweeteners for a wide range of industries, and is managed geographically on a regional basis. The Company’s operations are classified into four reportable business segments: North America, South America, Asia Pacific and Europe, Middle East and Africa (“EMEA”).  Its North America segment includes businesses in the U.S., Canada and Mexico. The Company’s South America segment includes businesses in Brazil, Colombia, Ecuador and the Southern Cone of South America, which includes Argentina, Chile, Peru and Uruguay. Its Asia Pacific segment includes businesses in South Korea, Thailand, China, Japan, Indonesia, the Philippines, Singapore, Malaysia, India, Australia and New Zealand. The Company’s EMEA segment includes businesses in Germany, the United Kingdom, Pakistan, South Africa and Kenya. The Company does not aggregate its operating segments when determining its reportable segments. Net sales by product are not presented because to do so would be impracticable.

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

(in millions)

    

2018

    

2017

 

Net sales to unaffiliated customers:

 

 

 

 

 

 

 

North America

 

$

874

 

$

881

 

South America

 

 

249

 

 

255

 

Asia Pacific

 

 

194

 

 

179

 

EMEA

 

 

152

 

 

138

 

Total

 

$

1,469

 

$

1,453

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

North America

 

$

143

 

$

158

 

South America

 

 

26

 

 

15

 

Asia Pacific

 

 

23

 

 

30

 

EMEA

 

 

31

 

 

28

 

Corporate

 

 

(23)

 

 

(21)

 

Subtotal

 

 

200

 

 

210

 

Restructuring/impairment charges

 

 

(3)

 

 

(10)

 

Acquisition/integration costs

 

 

 —

 

 

(2)

 

Charge for fair value markup of acquired inventory

 

 

 —

 

 

(5)

 

Total operating income

 

$

197

 

$

193

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

(in millions)

    

March 31, 2018

    

December 31, 2017

 

Total assets

 

 

 

 

 

 

 

North America

 

$

3,833

 

$

3,967

 

South America

 

 

775

 

 

812

 

Asia Pacific

 

 

825

 

 

774

 

EMEA

 

 

542

 

 

527

 

Total

 

$

5,975

 

$

6,080

 

 

 

12


 

 

7.      Financial Instruments, Derivatives and Hedging Activities

 

The Company is exposed to market risk stemming from changes in commodity prices (primarily corn and natural gas), foreign currency exchange rates and interest rates. In the normal course of business, the Company actively manages its exposure to these market risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities. These transactions utilize exchange-traded derivatives or over-the-counter derivatives with investment grade counterparties. Derivative financial instruments currently used by the Company consist of commodity-related futures, options and swap contracts, foreign currency-related forward contracts, interest rate swaps and Treasury lock agreements (“T-Locks”).

 

Commodity price hedging: The Company’s principal use of derivative financial instruments is to manage commodity price risk in North America relating to anticipated purchases of corn and natural gas to be used in the manufacturing process, generally over the next 12 to 24 months. The Company maintains a commodity-price risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity-price volatility. For example, the manufacturing of the Company’s products requires a significant volume of corn and natural gas. Price fluctuations in corn and natural gas cause the actual purchase price of corn and natural gas to differ from anticipated prices.

 

To manage price risk related to corn purchases in North America, the Company uses corn futures and options contracts that trade on regulated commodity exchanges to lock-in its corn costs associated with fixed-priced customer sales contracts. The Company uses over-the-counter natural gas swaps to hedge a portion of its natural gas usage in North America. These derivative financial instruments limit the impact that volatility resulting from fluctuations in market prices will have on corn and natural gas purchases and have been designated as cash flow hedges. The Company also enters into futures contracts to hedge price risk associated with fluctuations in the market price of ethanol. Unrealized gains and losses associated with marking the commodity hedging contracts to market (fair value) are recorded as a component of other comprehensive income (“OCI”) and included in the equity section of the Condensed Consolidated Balance Sheets as part of accumulated other comprehensive income/loss (“AOCI”). These amounts are subsequently reclassified into earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings, or in the month a hedge is determined to be ineffective. The Company assesses the effectiveness of a commodity hedge contract based on changes in the contract’s fair value. The changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in the price of the hedged items. The amounts representing the ineffectiveness of these cash flow hedges are not significant.

 

As of March 31, 2018, AOCI included $6 million of gains (net of an insignificant amount of tax), pertaining to commodities-related derivative instruments designated as cash flow hedges. As of December 31, 2017, AOCI included $12 million of losses (net of tax of $7 million), pertaining to commodities-related derivative instruments designated as cash flow hedges.

 

Interest rate hedging:  The Company assesses its exposure to variability in interest rates by identifying and monitoring changes in interest rates that may adversely impact future cash flows and the fair value of existing debt instruments, and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company’s outstanding and forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including sensitivity analysis, to estimate the expected impact of changes in interest rates on future cash flows and the fair value of the Company’s outstanding and forecasted debt instruments.

 

Derivative financial instruments that have been used by the Company to manage its interest rate risk consist of interest rate swaps and T-Locks. The Company periodically enters into T-Locks to hedge its exposure to interest rate changes. The T-Locks are designated as hedges of the variability in cash flows associated with future interest payments caused by market fluctuations in the benchmark interest rate until the fixed interest rate is established, and are accounted for as cash flow hedges. Accordingly, changes in the fair value of the T-Locks are recorded to AOCI until the consummation of the underlying debt offering, at which time any realized gain (loss) is amortized to earnings over the life of the debt. The Company also has interest rate swap agreements that effectively convert the interest rates on $200 million of its $400 million of 4.625 percent senior notes due November 1, 2020, to variable rates. These swap agreements call for the Company to receive interest at the fixed coupon rate of the respective notes and to pay interest at a variable rate based on the six-month U.S. LIBOR rate plus a spread. The Company has 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 accounts

13


 

 

for them as fair value hedges. Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability in the fair value of outstanding debt obligations are reported in earnings. These amounts offset the gain or loss (the change in fair value) of the hedged debt instrument that is attributable to changes in interest rates (the hedged risk), which is also recognized in earnings. The fair value of these interest rate swap agreements as of March 31, 2018 and December 31, 2017 was a $2 million reduction to debt and a $1 million increase to debt, respectively, and is reflected in the Condensed Consolidated Balance Sheets within other assets, with an offsetting amount recorded in long-term debt to adjust the carrying amount of hedged debt obligations. The Company did not have any T-Locks outstanding as of March 31, 2018 or December 31, 2017.

 

As of March 31, 2018, AOCI included $2 million of losses (net of income taxes of$(1), related to settled T-Locks. As of December 31, 2017, AOCI included $2 million of losses (net of income taxes of $1 million), related to settled T-Locks. These deferred losses are being amortized to financing costs over the terms of the senior notes with which they are associated.

 

Foreign currency hedging: Due to the Company’s global operations, including operations in many emerging markets, it is exposed to fluctuations in foreign currency exchange rates. As a result, the Company has exposure to translational foreign exchange risk when the results of its foreign operations are translated to U.S. dollars and to transactional foreign exchange risk when transactions not denominated in the functional currency are revalued. The Company primarily uses derivative financial instruments such as foreign currency forward contracts, swaps and options to manage its transactional foreign exchange risk. As of March 31, 2018, the Company had foreign currency forward sales contracts that are designated as fair value hedges with an aggregate notional amount of $438 million and foreign currency forward purchase contracts with an aggregate notional amount of $133 million that hedged transactional exposures. As of December 31, 2017, the Company had foreign currency forward sales contracts with an aggregate notional amount of $447 million and foreign currency forward purchase contracts with an aggregate notional amount of $121 million that hedged transactional exposures.

 

The Company also has foreign currency derivative instruments that hedge certain foreign currency transactional exposures and are designated as cash flow hedges. As of March 31, 2018, AOCI included $2 million of gains (net of income taxes of $1 million) related to foreign currency derivative instruments. As of December 31, 2017, AOCI included $1 million of gains (net of income taxes of $1 million) related to these hedges.

 

The fair value and balance sheet location of the Company’s derivative instruments, presented gross in the Condensed Consolidated Balance Sheets, are reflected below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Derivative Instruments as of March 31, 2018

 

Derivatives Designated as Hedging Instruments (in millions):

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Commodity and foreign currency

 

Accounts receivable, net

 

$

29

 

Accounts payable and accrued liabilities

 

$

14

 

Commodity, foreign currency, and interest rate contracts

 

Other assets

 

 

 2

 

Non-current liabilities

 

 

11

  

 

 

 

 

$

31

 

 

 

$

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Derivative Instruments as of December 31, 2017

 

Derivatives Designated as Hedging Instruments (in millions):

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Commodity and foreign currency

 

Accounts receivable, net

 

$

11

 

Accounts payable and accrued liabilities

 

$

23

 

Commodity, foreign currency, and interest rate contracts

 

Other assets

 

 

 3

 

Non-current liabilities

 

 

 8

 

 

 

 

 

$

14

 

 

 

$

31

 

 

As of March 31, 2018, the Company had outstanding futures and option contracts that hedged the forecasted purchase of approximately 75 million bushels of corn and 3 million pounds of soybean oil. The Company is unable to

14


 

 

directly hedge price risk related to co-product sales; however, it occasionally enters into hedges of soybean oil (a competing product to corn oil) in order to mitigate the price risk of corn oil sales. The Company also had outstanding swap and option contracts that hedged the forecasted purchase of approximately 32 million mmbtu’s of natural gas at March 31, 2018. Additionally, as of March 31, 2018, the Company had outstanding ethanol futures contracts that hedged the forecasted sale of approximately 6 million gallons of ethanol.

 

Additional information relating to the Company’s derivative instruments is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

Derivatives in Cash Flow Hedging Relationships

 

Amount of Gains
(Losses) Recognized in 
OCI on Derivatives

 

Location of Gains (Losses) Reclassified from AOCI into Income

 

Amount of Gains

(Losses) Reclassified from

AOCI into Income

 

Commodity contracts

 

$

20

 

Cost of sales

 

$

(5)

 

Foreign currency contracts

 

 

 2

 

Net sales/cost of sales

 

 

 1

 

Total

 

$

22

 

 

 

$

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

Derivatives in Cash Flow Hedging Relationships

 

Amount of Gains
(Losses) Recognized in 
OCI on Derivatives

 

Location of Gains (Losses) Reclassified from AOCI into Income

 

Amount of Gains

(Losses) Reclassified from

AOCI into Income

 

Commodity contracts

 

$

 7

 

Cost of sales