Ingredion Inc - Quarter Report: 2014 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

FOR THE QUARTERLY PERIOD ENDED March 31, 2014

 

or

 

 

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)

 

 

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

 

(Check one):

 

 

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

 

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

 

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1

 

FINANCIAL STATEMENTS

 

Ingredion Incorporated (“Ingredion”)

 

Condensed Consolidated Statements of Income

(Unaudited)

 

(In millions, except per share amounts)

 

		Three Months Ended March 31,
		2014			2013
Net sales before shipping and handling costs		$	1,435.0		$	1,662.4
Less: shipping and handling costs		77.8			78.6
Net sales		1,357.2			1,583.8
Cost of sales		1,107.4			1,278.2
Gross profit		249.8			305.6
Operating expenses		132.4			135.5
Other (income), net		(4.9		)	(5.0		)
Operating income		122.3			175.1
Financing costs, net		16.6			16.8
Income before income taxes		105.7			158.3
Provision for income taxes		30.5			46.3
Net income		75.2			112.0
Less: Net income attributable to non-controlling interests		2.6			1.2
Net income attributable to Ingredion		$	72.6		$	110.8
Weighted average common shares outstanding:
Basic		74.6			77.4
Diluted		75.8			78.8
Earnings per common share of Ingredion:
Basic		$	0.97		$	1.43
Diluted		$	0.96		$	1.41

 

See Notes to Condensed Consolidated Financial Statements

 

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PART I FINANCIAL INFORMATION

 

ITEM 1

 

FINANCIAL STATEMENTS

 

Ingredion Incorporated (“Ingredion”)

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

(In millions)

		Three Months Ended March 31,
		2014			2013
Net income		$	75		$	112
Other comprehensive income (loss):
Gains (losses) on cash-flow hedges, net of income tax effect of $13 and $4, respectively		26			(9		)
Amount of (gains) losses on cash-flow hedges reclassified to earnings, net of income tax effect of $6 and $6, respectively		13			(12		)
Losses related to pension and other postretirement obligations reclassified to earnings, net of income tax effect		1			1
Currency translation adjustment		(32		)	(22		)
Comprehensive income		83			70
Comprehensive income attributable to non-controlling interests		(3		)	(1		)
Comprehensive income attributable to Ingredion		$	80		$	69

 

See Notes to Condensed Consolidated Financial Statements

 

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PART I FINANCIAL INFORMATION

 

ITEM I — FINANCIAL STATEMENTS

 

Ingredion Incorporated (“Ingredion”)

Condensed Consolidated Balance Sheets

 

(In millions, except share and per share amounts)		March 31, 2014			December 31, 2013
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	560		$	574
Accounts receivable — net		813			832
Inventories		757			723
Prepaid expenses		21			17
Deferred income taxes		36			68
Total current assets		2,187			2,214
Property, plant and equipment - net of accumulated depreciation of $2,801 and $2,776, respectively		2,136			2,156
Goodwill		530			535
Other intangible assets - net of accumulated amortization of $53 and $49, respectively		308			311
Deferred income taxes		14			15
Investments		10			11
Other assets		116			118
Total assets		$	5,301		$	5,360
Liabilities and equity
Current liabilities
Short-term borrowings		$	61		$	93
Accounts payable and accrued liabilities		658			727
Total current liabilities		719			820
Non-current liabilities		153			163
Long-term debt		1,718			1,717
Deferred income taxes		207			207
Share-based payments subject to redemption		15			24
Equity
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 and 77,672,670 shares issued at March 31, 2014 and December 31, 2013, respectively		1			1
Additional paid-in capital		1,171			1,166
Less: Treasury stock (common stock; 3,268,524 and 3,361,180 shares at March 31, 2014 and December 31, 2013, respectively) at cost		(220		)	(225		)
Accumulated other comprehensive loss		(575		)	(583		)
Retained earnings		2,086			2,045
Total Ingredion stockholders’ equity		2,463			2,404
Non-controlling interests		26			25
Total equity		2,489			2,429
Total liabilities and equity		$	5,301		$	5,360

 

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
(in millions)		Common Stock			Additional Paid-In Capital			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Non- controlling Interests			Share-based Payments Subject to Redemption
Balance, December 31, 2013		$	1		$	1,166		$	(225	)	$	(583	)	$	2,045		$	25		$	24
Net income attributable to Ingredion														73
Net income attributable to non-controlling interests																	3
Dividends declared														(32		)	(2		)
Gains on cash-flow hedges, net of income tax effect of $13											26
Amount of losses on cash-flow hedges reclassified to earnings, net of income tax effect of $6											13
Share-based compensation					5			5												(9		)
Losses related to pension and other postretirement obligations reclassified to earnings, net of income tax effect											1
Currency translation adjustment											(32		)
Balance, March 31, 2014		$	1		$	1,171		$	(220	)	$	(575	)	$	2,086		$	26		$	15

 

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		Total Equity
(in millions)		Common Stock			Additional Paid-In Capital			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Non- controlling Interests			Share-based Payments Subject to Redemption
Balance, December 31, 2012		$	1		$	1,148		$	(6	)	$	(475	)	$	1,769		$	22		$	19
Net income attributable to Ingredion														111
Net income attributable to non-controlling interests																	1
Dividends declared														(30		)	(2		)
Losses on cash-flow hedges, net of income tax effect of $4											(9		)
Amount of gains on cash-flow hedges reclassified to earnings, net of income tax effect of $6											(12		)
Share-based compensation					11			(1		)										(3		)
Losses related to pension and other postretirement obligations reclassified to earnings, net of income tax effect											1
Currency translation adjustment											(22		)
Balance, March 31, 2013		$	1		$	1,159		$	(7	)	$	(517	)	$	1,850		$	21		$	16

 

See Notes to Condensed Consolidated Financial Statements

 

 

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PART I FINANCIAL INFORMATION

 

ITEM 1

FINANCIAL STATEMENTS

 

Ingredion Incorporated (“Ingredion”)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

(In millions)		Three Months Ended March 31,
		2014			2013
Cash provided by operating activities:
Net income		$	75		$	112
Non-cash charges to net income:
Depreciation and amortization		48			49
Changes in working capital:
Accounts receivable and prepaid items		(8		)	(75		)
Inventories		(35		)	(80		)
Accounts payable and accrued liabilities		(12		)	(67		)
Decrease in margin accounts		32			—
Other		21			31
Cash provided by (used for) operating activities		121			(30		)
Cash used for investing activities:
Capital expenditures, net of proceeds on disposals		(59		)	(66		)
Short-term investments		—			19
Other		—			2
Cash used for investing activities		(59		)	(45		)
Cash used for financing activities:
Proceeds from borrowings		12			17
Payments on debt		(46		)	(6		)
Issuance (repurchase) of common stock, net		(1		)	8
Dividends paid (including to non-controlling interests)		(33		)	(22		)
Cash used for financing activities		(68		)	(3		)
Effect of foreign exchange rate changes on cash		(8		)	(5		)
Decrease in cash and cash equivalents		(14		)	(83		)
Cash and cash equivalents, beginning of period		574			609
Cash and cash equivalents, end of period		$	560		$	526

 

See Notes to Condensed Consolidated Financial Statements

 

7

 

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, 2013.

 

The unaudited condensed consolidated interim 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, 2013 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, 2014 and 2013, and the financial position of the Company as of March 31, 2014.  The results for the interim periods are not necessarily indicative of the results expected for the full years.

 

2.                                      New Accounting Standards

 

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.  This Update clarifies the guidance pertaining to the release of the cumulative translation adjustment (“CTA”) to resolve diversity in practice.  The Update clarifies that when a company ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the company should release any related CTA into net income.  In such instances, the CTA should be released into net income only if a sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.  The Update also requires the release of the CTA (or applicable pro rata portion thereof) upon the sale or partial sale of an equity method investment that is a foreign entity and for a step acquisition in which the acquirer held an equity method investment prior to obtaining control.  The guidance in this Update is effective prospectively for fiscal years beginning after December 15, 2013, and interim periods within those fiscal years.  The adoption of the guidance contained in this Update did not have an impact on the Company’s 2014 Condensed Consolidated Financial Statements.  However, the guidance contained in this Update will impact the accounting for the CTA upon any future de-recognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity; and the effect will be dependent upon a relevant transaction at that time.

 

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  This Update provides guidance pertaining to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists, to resolve diversity in practice.  The Update requires that companies present an unrecognized tax benefit as a reduction of a deferred tax asset for a tax loss or credit carryforward on the balance sheet when (a) the tax law requires the company to use the tax loss or credit carryforward to satisfy

 

8

 

amounts payable upon disallowance of the tax position; or (b) the tax loss or credit carryforward is available to satisfy amounts payable upon disallowance of the tax position, and the company intends to use the deferred tax asset for that purpose. The guidance in this Update is effective prospectively for fiscal years beginning after December 15, 2013, and interim periods within those fiscal years.  The Company adopted the guidance in this Update prospectively and the adoption did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

3.                                      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, the Middle East and Africa (“EMEA”).  The North America segment includes businesses in the United States, Canada and Mexico.  The Company’s South America segment includes businesses in Brazil, Colombia, Ecuador, Peru and the Southern Cone of South America, which includes Argentina, Chile and Uruguay.  The Asia Pacific segment includes businesses in Korea, Thailand, Malaysia, China, Japan, Indonesia, the Philippines, Singapore, India, Australia and New Zealand.  The Company’s EMEA segment includes businesses in the United Kingdom, Germany, South Africa, Pakistan and Kenya.

 

		Three Months Ended March 31,
(in millions)		2014			2013
Net Sales
North America		$	736.9		$	909.8
South America		293.8			348.7
Asia Pacific		185.4			195.5
EMEA		141.1			129.8
Total		$	1,357.2		$	1,583.8
Operating Income
North America		$	65.2		$	107.7
South America		29.9			43.4
Asia Pacific		25.7			23.0
EMEA		21.1			19.3
Corporate		(19.6		)	(18.3		)
Total		$	122.3		$	175.1

 

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(in millions)		At March 31, 2014			At Dec. 31, 2013
Total Assets
North America		$	2,984		$	3,008
South America		1,031			1,088
Asia Pacific		713			711
EMEA		573			553
Total		$	5,301		$	5,360

 

4.             Financial Instruments, Derivatives and Hedging Activities

 

The Company is exposed to market risk stemming from changes in commodity prices (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 futures, options and swap contracts, foreign currency forward contracts and swaps, and interest rate swaps.

 

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 twelve to eighteen months.  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 firm-priced customer sales contracts.  The Company uses over-the-counter 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.  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.

 

At March 31, 2014, AOCI included $8 million of gains, net of tax of $4 million, pertaining to commodities-related derivative instruments designated as cash-flow hedges.  At December 31, 2013, AOCI included $32 million of losses, net of tax of $15 million, pertaining to commodities-related derivative instruments designated as cash-flow hedges.

 

10

 

Interest rate hedging:  Derivative financial instruments that have been used by the Company to manage its interest rate risk consist of Treasury Lock agreements (“T-Locks”) and interest rate swaps.  The Company did not have any T-locks outstanding at March 31, 2014 or December 31, 2013.  The Company has interest rate swap agreements that effectively convert the interest rate on its 3.2 percent $350 million senior notes due November 1, 2015 to a variable rate.  These swap agreements call for the Company to receive interest at a fixed rate (3.2 percent) and to pay interest at a variable rate based on the six-month US dollar 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 obligation attributable to changes in interest rates and accounts 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 (that is the change in fair value) of the hedged debt instrument that is attributable to changes in interest rates (that is, the hedged risk), which is also recognized in earnings.  The fair value of these interest rate swap agreements at March 31, 2014 and December 31, 2013 was $14 million and $13 million, 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 the hedged debt obligation.

 

AOCI included $8 million of losses (net of income taxes of $5 million) related to settled T-Locks at both March 31, 2014 and December 31, 2013.  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 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 its foreign operation results are translated to US dollars and to transactional foreign exchange risk when transactions not denominated in the functional currency of the operating unit 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.  At March 31, 2014, the Company had foreign currency forward sales contracts with an aggregate notional amount of $136 million and foreign currency forward purchase contracts with an aggregate notional amount of $51 million that hedged transactional exposures.  At December 31, 2013, the Company had foreign currency forward sales contracts with an aggregate notional amount of $147 million and foreign currency forward purchase contracts with an aggregate notional amount of $78 million that hedged transactional exposures.  The fair value of these derivative instruments are liabilities of $6 million and $5 million at March 31, 2014 and December 31, 2013, respectively.

 

The Company also has foreign currency derivative instruments that hedge certain foreign currency transactional exposures and are designated as cash-flow hedges.  At March 31, 2014, AOCI included $1 million of net losses, net of income taxes, associated with these hedges.  At December 31, 2013, AOCI included $1 million of net gains, net of income taxes, associated with these hedges.

 

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The fair value and balance sheet location of the Company’s derivative instruments, accounted for as cash-flow hedges and presented gross on the Condensed Consolidated Balance Sheets, are reflected below:

 

 

		Fair Value of Derivative Instruments
				Fair Value								Fair Value
Derivatives designated as cash-flow hedging instruments: (in millions)		Balance Sheet Location		At March 31, 2014			At December 31, 2013			Balance Sheet Location		At March 31, 2014			At December 31, 2013
Commodity and foreign currency contracts		Accounts receivable-net		$	19		$	2		Accounts payable and accrued liabilities		$	6		$	27
Commodity and foreign currency contracts		Other assets		2			5
Total				$	21		$	7				$	6		$	27

 

At March 31, 2014, the Company had outstanding futures and option contracts that hedged the forecasted purchase of approximately 58 million bushels of corn.  Also at March 31, 2014, the Company had outstanding swap and option contracts that hedged the forecasted purchase of approximately 10 million mmbtu’s of natural gas.  The Company is unable to 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.  No such hedges were in place at March 31, 2014.

 

Additional information relating to the Company’s derivative instruments is presented below (in millions, pre-tax):

 

 

		Amount of Gains (Losses) Recognized in OCI on Derivatives						Location of Gains (Losses)		Amount of Gains (Losses) Reclassified from AOCI  into Income
Derivatives in Cash-Flow Hedging Relationships		Three Months Ended March 31, 2014			Three Months Ended March 31, 2013			Reclassified from AOCI into Income		Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
Commodity and foreign currency contracts		$	39		$	(13	)	Cost of sales		$	(18	)	$	19
Interest rate contracts		—			—			Financing costs, net		(1		)	(1		)
Total		$	39		$	(13	)			$	(19	)	$	18

 

At March 31, 2014, AOCI included approximately $7 million of gains, net of income taxes of $4 million, on commodities-related derivative instruments designated as cash-flow hedges that are expected to be reclassified into earnings during the next twelve months.  The Company expects the gains to be offset by changes in the underlying commodities cost.  Additionally at March 31, 2014, AOCI included $2 million of losses on settled T-Locks (net of income taxes of $1 million) and $2 million of losses related to foreign currency hedges (net of income taxes of $1 million), which are expected to be reclassified into earnings during the next twelve months.

 

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Presented below are the fair values of the Company’s financial instruments and derivatives for the periods presented:

 

		At March 31, 2014												At December 31, 2013
(in millions)		Total			Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3
Available for sale securities		$	3		$	3		$	—		$	—		$	4		$	4		$	—		$	—
Derivative assets		35			16			19			—			20			—			20			—
Derivative liabilities		12			3			9			—			32			22			10			—
Long-term debt		1,847			—			1,847			—			1,813			—			1,813			—

 

Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets or liabilities.  Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.  Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability or can be derived principally from or corroborated by observable market data.   Level 3 inputs are unobservable inputs for the asset or liability.  Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 

The carrying values of cash equivalents, short-term investments, accounts receivable, accounts payable and short-term borrowings approximate fair values.  Commodity futures, options and swap contracts are recognized at fair value.  Foreign currency forward contracts, swaps and options are also recognized at fair value.  The fair value of the Company’s long-term debt is estimated based on quotations of major securities dealers who are market makers in the securities.  At March 31, 2014, the carrying value and fair value of the Company’s long-term debt were $1.72 billion and $1.85 billion, respectively.

 

5.             Share-Based Compensation

 

A summary of information with respect to share-based compensation is as follows:

 

 

		For the Three Months Ended March 31,
(in millions)		2014			2013
Total share-based compensation expense included in net income		$	4.7		$	4.6
Income tax benefit related to share-based compensation included in net income		$	1.4		$	1.4

 

Stock Options:

 

Under the Company’s stock incentive plan, stock options are granted at exercise prices that equal the market value of the underlying common stock on the date of grant.  The options have a 10-year term and are exercisable upon vesting, which occurs over a three-year period at the anniversary dates of the date of grant.  Compensation expense is recognized on a straight-line basis for all awards.  Expense recognized for stock options was $2 million in both first quarter 2014 and 2013.

 

The Company granted non-qualified options to purchase 710 thousand shares and 415 thousand shares of the Company’s common stock during the three months ended March 31,

 

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2014 and 2013, respectively. The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

		For the Three Months Ended March 31,
		2014		2013
Expected life (in years)		5.5		5.8
Risk-free interest rate		1.63	%	1.11	%
Expected volatility		30.28	%	32.64	%
Expected dividend yield		2.82	%	1.57	%

 

The expected life of options represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns.  The risk-free interest rate is based on the US Treasury yield curve in effect at the grant date for the period corresponding with the expected life of the options.  Expected volatility is based on historical volatilities of the Company’s common stock.  Dividend yields are based on historical dividend payments.

 

Stock option activity for the three months ended March 31, 2014 was as follows:

 

(dollars and options in thousands, except per share amounts)		Number of Options		Weighted Average Exercise Price per Share			Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2013		2,849		$	40.77
Granted		710		59.58
Exercised		(83)		32.95
Cancelled		(13)		61.30
Outstanding at March 31, 2014		3,463		44.74			6.45		$	80,829
Exercisable at March 31, 2014		2,392		37.63			5.13		$	72,844

 

For the three months ended March 31, 2014, cash received from the exercise of stock options was $3 million.  At March 31, 2014, the total remaining unrecognized compensation cost related to stock options approximated $14 million, which will be amortized over the weighted-average period of approximately 2.3 years.

 

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Additional information pertaining to stock option activity is as follows:

 

(dollars in thousands, except per share)		Three Months Ended March 31,
		2014			2013
Weighted average grant date fair value of stock options granted (per share)		$	12.97		$	17.87
Total intrinsic value of stock options exercised		$	2,775		$	11,185

 

Restricted Shares of Common Stock and Restricted Stock Units:

 

The Company has granted shares of restricted common stock (“restricted shares”) and restricted stock units (“restricted units”) to certain key employees.  The restricted shares and restricted units are subject to cliff vesting, generally after three to five years provided the employee remains in the service of the Company.  The fair value of the restricted shares and restricted units is determined based upon the number of shares granted and the quoted market price of the Company’s common stock at the date of the grant.  Expense recognized for restricted shares and restricted units for the three months ended March 31, 2014 aggregated $2 million, consistent with the comparable prior-year period.

 

The following table summarizes restricted share and restricted unit activity for the three months ended March 31, 2014:

 

		Restricted Shares					Restricted Units
(in thousands, except per share amounts)		Number of Restricted Shares		Weighted Average Fair Value per Share			Number of Restricted Units		Weighted Average Fair Value per Share
Non-vested at December 31, 2013		48		$	26.25		469		$	54.47
Granted		—		—			143		60.26
Vested		(30	)	25.58			(150	)	49.27
Cancelled		—		—			(10	)	53.14
Non-vested at March 31, 2014		18		27.33			452		58.06

 

At March 31, 2014, the total remaining unrecognized compensation cost related to restricted units was $16 million, which will be amortized over a weighted-average period of approximately 2.3 years.  Unrecognized compensation cost related to restricted shares was insignificant at March 31, 2014.

 

6.             Net Periodic Pension and Postretirement Benefit Costs

 

For detailed information about the Company’s pension and postretirement benefit plans, please refer to Note 8 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

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The following table sets forth the components of net periodic benefit cost of the US and non-US defined benefit pension plans for the periods presented:

 

(in millions)		Three Months Ended March 31,
		US Plans						Non-US Plans
		2014			2013			2014			2013
Service cost		$	1.8		$	2.0		$	1.5		$	2.4
Interest cost		3.3			2.8			3.6			3.1
Expected return on plan assets		(5.2		)	(4.6		)	(3.5		)	(3.0		)
Amortization of net actuarial loss		0.1			0.5			0.8			1.2
Amortization of transition obligation		—			—			0.1			0.1
Net pension cost		$	—		$	0.7		$	2.5		$	3.8

 

The Company currently anticipates that it will make approximately $10 million in cash contributions to its pension plans in 2014, consisting of $2 million to its US pension plans and $8 million to its non-US pension plans.  For the three months ended March 31, 2014, cash contributions of approximately $2 million were made to the non-US plans.  No cash contributions were made to the US plans during first quarter 2014.

 

The following table sets forth the components of net postretirement benefit cost for the periods presented:

 

(in millions)		Three Months Ended March 31,
		2014			2013
Service cost		$	0.7		$	0.8
Interest cost		0.9			1.0
Amortization of net actuarial loss		0.1			0.3
Net postretirement benefit cost		$	1.7		$	2.1

 

7.             Inventories

 

Inventories are summarized as follows:

 

(in millions)		At March 31, 2014			At December 31, 2013
Finished and in process		$	454		$	440
Raw materials		258			235
Manufacturing supplies and other		45			48
Total inventories		$	757		$	723

 

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