Ingredion Inc - Annual Report: 2016 (Form 10-K)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

 

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

 

For the fiscal year ended December 31, 2016

 

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)

 

 

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

 

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

 

 

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 ☒ No  ☐

 

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 ☐ No ☒

 

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 ☒  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 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.   ☐

 

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)

 

 

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

 

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 $129.41 on June 30, 2016, and, for the purpose of this calculation only, the assumption that all of the Registrant's directors and executive officers are affiliates) was approximately $9,305,000,000.

 

The number of shares outstanding of the Registrant's Common Stock, par value $.01 per share, as of February 17, 2017, was 71,790,000.

 

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 2016 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2016.

 

 

 

 

INGREDION INCORPORATED

FORM 10-K

TABLE OF CONTENTS

 

 

 

PART I.

 

ITEM 1.              BUSINESS

 

The Company

 

Ingredion Incorporated (“Ingredion”) is a leading global ingredients solutions provider. We turn corn, tapioca, potatoes and other vegetables and fruits into value-added ingredients and biomaterials for the food, beverage, paper and corrugating, brewing and other industries. Ingredion was incorporated as a Delaware corporation in 1997 and its common stock is traded on the New York Stock Exchange.

 

On December 29, 2016, we completed our acquisition of TIC Gums Incorporated (“TIC Gums”), a privately held, U.S.-based company that provides advanced texture systems to the food and beverage industry for $395 million, net of cash acquired.  Consistent with our Strategic Blueprint for growth, this acquisition enhances our texture capabilities and formulation expertise and provides additional opportunities for us to provide solutions for natural, organic and clean-label demands of our customers.  TIC Gums utilizes a variety of agriculturally derived ingredients, such as acacia gum and guar gum, to form the foundation for innovative texture systems and allow for clean-label reformulation.  TIC Gums operates two production facilities, one in Belcamp, Maryland and one in Guangzhou, China.  TIC Gums also maintains an R&D lab within these two production facilities.

 

On March 11, 2015, we completed our acquisition of Penford Corporation (“Penford”), a manufacturer of specialty starches that was headquartered in Centennial, Colorado. The total purchase consideration for Penford was $332 million, which included the extinguishment of $93 million in debt in conjunction with the acquisition.  The acquisition of Penford provides us with, among other things, an expanded specialty ingredient product portfolio consisting of potato starch-based offerings.  Penford had net sales of $444 million for the fiscal year ended August 31, 2014 and operated six manufacturing facilities in the United States, all of which manufacture specialty starches.

 

On August 3, 2015, we completed our acquisition of Kerr Concentrates, Inc. (“Kerr”), a privately-held producer of natural fruit and vegetable concentrates for approximately $102 million in cash.  Kerr serves major food and beverage companies, flavor houses and ingredient producers from its manufacturing locations in Oregon and California.  The acquisition of Kerr provides us with the opportunity to expand our product portfolio.

 

We are principally engaged in the production and sale of starches and sweeteners for a wide range of industries, and are managed geographically on a regional basis.  Our operations are classified into four reportable business segments:  North America, South America, Asia Pacific and Europe, Middle East and Africa (“EMEA”).  Our North America segment includes businesses in the United States, Canada and Mexico.  Our South America segment includes businesses in Brazil, Colombia, Ecuador and the Southern Cone of South America, which includes Argentina, Chile, Peru and Uruguay.  Our Asia Pacific segment includes businesses in South Korea, Thailand, Malaysia, China, Japan, Indonesia, the Philippines, Singapore, India, Australia and New Zealand.  Our EMEA segment includes businesses in the United Kingdom, Germany, South Africa, Pakistan and Kenya.

 

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, paper and corrugating, brewing, pharmaceutical, 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, and biomaterials.  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.  At the same time, we believe that our corporate functions allow us to identify synergies and maximize the benefits of our global presence.

 

Geographic Scope and Operations

 

We are principally engaged in the production and sale of starches and sweeteners for a wide range of industries, and we manage our business on a geographic regional basis.  Our consolidated net sales were $5.70 billion in 2016.  Our operations are classified into four reportable business segments: North America, South America, Asia Pacific and EMEA (Europe, Middle East and Africa).  In 2016, approximately 60 percent of our net sales were derived from operations in North America, while net sales from operations in South America represented 18 percent.  Net sales from operations in Asia Pacific and EMEA represented approximately 12 percent and 10 percent, respectively, of our 2016 net sales.  See Note 13 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 on a consolidated basis.

 

Our North America segment consists of operations in the US, Canada and Mexico. The region’s facilities include 21 plants producing a wide range of sweeteners, starches and fruit and vegetable concentrates.

 

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 9 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, from which we supply not only our Asia Pacific segment but the rest of our global network.  The region’s facilities include 9 plants that produce modified, specialty, regular, waxy, tapioca and rice 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.

 

Products

 

Starch Products.  Our starch products represented approximately 46 percent, 44 percent and 43 percent of our net sales for 2016, 2015 and 2014, 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.

 

Sweetener Products. Our sweetener products represented approximately 37 percent, 40 percent and 39 percent of our net sales for 2016, 2015 and 2014, 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.

 

Specialty Ingredients.  We consider certain of our starch and sweetener products to be specialty ingredients.  Specialty ingredients comprised approximately 26 percent of our net sales for 2016, up from 25 percent and 24 percent in 2015 and 2014, respectively.  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 five growth platforms: Wholesome, Texture, Nutrition, Sweetness, and Biomaterial Solutions.

 

 

Wholesome: Clean and simple specialty ingredients that consumers can identify and trust.  Products include Novation clean label functional starches, value added pulse-based ingredients and gluten free offerings.  Texture: Specialty ingredients that provide precise food texture solutions designed to optimize the consumer experience and build back texture.  Include starch systems that replace more expensive ingredients and are designed to optimize customer formulation costs, texturizers that are designed to 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 complementary nutritional ingredients address the leading health and wellness concerns of consumers, including digestive health, infant nutrition, weight control and energy management.  Sweetness: Specialty ingredients that provide affordable, natural, reduced calorie and sugar-free solutions for our customers.  We have a broad portfolio of nutritive and non-nutritive sweeteners, including high potency sweeteners and naturally based stevia sweeteners.  Biomaterial Solutions: Nature-based materials that help manufacturers become more sustainable by replacing synthetic materials in personal care, home care and other industrial segments.

 

Each growth platform addresses multiple consumer trends. To demonstrate how Ingredion is positioned to address market trends and customer needs, we present our internal growth platforms externally as “Benefit Platforms.” Connecting our capabilities to key trends and customer challenges, these Benefit Platforms include products designed to provide:

 

 

Co-Products and others.  Co-products and others accounted for 17 percent, 16 percent and 18 percent of our net sales for 2016, 2015 and 2014, 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.

 

Competition

 

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

 

Many smaller local corn and tapioca refiners also operate in many of our markets. Competition within our markets is largely based on price, quality and product availability.

 

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

 

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 2016:

 

 

No customer accounted for 10 percent or more of our net sales in 2016, 2015 or 2014.

 

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 use starch from potato processors as the primary raw material to manufacture ingredients derived from potato-based starches.  We also use tapioca, rice, gum and sugar as raw material.

 

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

 

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

 

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

 

We follow a policy of hedging our exposure to commodity price 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 a global network of more than 350 scientists working in 27 Ingredion Idea Labs™ innovation centers with headquarters 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 was approximately $41 million in 2016, $43 million in 2015 and $37 million in 2014.

 

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 staff that provide 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 more than 850 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, 2016 we had approximately 11,000 employees, of which approximately 2,600 were located in the United States.  Approximately 31 percent of US and 39 percent of our non-US employees are unionized. 

 

Government Regulation and Environmental Matters

 

As a manufacturer and marketer of food items and items for use in the pharmaceutical industry, our operations and the use of many of our products are subject to various federal, state, foreign and local statutes and regulations, including the Federal Food, Drug and Cosmetic Act and the Occupational Safety and Health Act.  We and many of our products are also subject to regulation by various government agencies, including the United States Food and Drug Administration.  Among other things, applicable regulations prescribe requirements and establish standards for product quality, purity and labeling.  Failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines.  No such fines of a material nature were imposed on us in 2016.  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 2016, we spent approximately $11 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 $21 million and $14 million for environmental facilities and programs in 2017 and 2018, respectively.

 

Other

 

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

 

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.

 

 

 

 

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 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 could increase our inventory carrying costs.  Alternatively, this forecasting difficulty could cause a shortage of products that could result in an inability to satisfy demand for our products.

 

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

 

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

 

We primarily sell products derived from world commodities.  Historically, we have been able to adjust local prices relatively quickly to offset the effect of local currency devaluations, although we cannot guarantee our ability to do this in the future.  For example, due to pricing controls on many consumer products imposed in the recent past by the Argentina government, it took longer than it had previously taken to achieve pricing improvement in response to currency devaluations in that country.  The anticipated strength in the US dollar may continue to provide some challenges as it could take an extended period of time to fully recapture the impact of foreign currency devaluations, particularly in South America.

 

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.  We also manufacture certain starch-based products from potatoes.  Our current potato starch requirements constitute a material portion of the available North American supply.  It is possible that, in the long term, continued growth in demand for potato starch-based ingredients and new product development could result in capacity constraints.  Also, we utilize tapioca in the manufacturing of starch products primarily in Thailand. With our acquisition of TIC Gums, we now sell products made from acacia gum, approximately half of which we purchase in the Sudan.  If our raw materials are not available in sufficient quantities or quality, our results of operations could be negatively impacted.

 

Energy costs represent approximately 10 percent of our finished product costs. We use energy primarily to create steam in production processes and to dry products.  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 derived from corn 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.  Additionally, we produce and sell ethanol and enter into swap contracts to hedge price risk associated with fluctuations in market prices of ethanol.  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 the commodity (corn, soybean oil or ethanol) 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. 

 

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.

 

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 in which 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 (reflected, for instance, in taxes designed to combat obesity which have been imposed recently in North America) represent a significant challenge to some of our customers, including those engaged in the food and soft drink industries.

 

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

 

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

 

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

 

Our information technology systems, 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 future growth could be negatively impacted if we fail to introduce sufficient new products and services.

 

While we do not believe that any individual patent or trademark is material to our business, a portion of our growth comes from innovation in products, processes and services.  We cannot guarantee that our research and development efforts will result in new products and services at a rate or of a quality sufficient to meet expectations.

 

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

 

Approximately 31 percent of our US and 39 percent of our non-US employees are members of unions.  Strikes, lockouts or other work stoppages or slowdowns 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 52 percent of our 2016 sales were made to companies engaged in the food industry and approximately 11 percent each were made to companies in the beverage industry and companies in the paper and corrugating industry.  Additionally, sales to the animal nutrition markets and the brewing industry represented approximately 10 percent and 8 percent of our 2016 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 in which we sell or manufacture products or purchase raw materials 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 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, modification or termination of trade agreements or treaties promoting free trade, creation of new trade agreements or treaties, 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 in which we conduct business.

 

Future costs of environmental compliance may be material.

 

Our business could be affected in the future by national and global regulation or taxation of greenhouse gas emissions.  In the United States, the US Environmental Protection Agency (“EPA”) has adopted regulations requiring the owners and operators of certain facilities to measure and report their greenhouse gas emission.  The US EPA has also begun to regulate greenhouse gas emissions from certain stationary and mobile sources under the Clean Air Act.  For example, the US EPA has proposed rules regarding the construction and operation of coal-fired boilers. California and Ontario are also moving forward with various programs to reduce greenhouse gases.  Globally, a number of countries

that are parties to the Kyoto Protocol have instituted or are considering climate change legislation and regulations.  Most notable is the European Union Greenhouse Gas Emission Trading System.  It is difficult at this time to estimate the likelihood of passage or predict the potential impact of any additional legislation.  Potential consequences could include increased energy, transportation and raw materials costs and may require the Company to make additional investments in its facilities and equipment.

 

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

 

We have $1.3 billion of total intangible assets at December 31, 2016, consisting of $784 million of goodwill and $502 million of other intangible assets.  Additionally, we have $2.2 billion of long-lived assets at December 31, 2016.

 

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.  Based on the results of the annual assessment, we concluded that as of October 1, 2016, it was more likely than not that the fair value of all of our reporting units was greater than their carrying value and no additional impairment charges were necessary (although the $26 million of goodwill at our Brazil reporting unit continues to be closely monitored due to recent trends and increased volatility experienced in this reporting unit, such as continued slow economic growth, heightened competition and possible future negative economic growth).  Additionally, significant risk and uncertainty exists around certain manufacturing assets in Argentina and Brazil that we are closely monitoring due to increased volatility experienced due to continued slow economic growth, heightened competition, and possible future negative economic growth.

 

Even though it was determined that there was no additional long-lived asset impairment as of October 1, 2016, 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, 2017.

 

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, change the tax rate or alter the taxation of offshore earnings, changes in the valuation of deferred tax assets and liabilities and material adjustments from tax audits.

 

Significant changes in the tax laws of the US and numerous foreign jurisdictions in which we do business could result from the base erosion and profit shifting (BEPS) project undertaken by the Organization for Economic Cooperation and Development (OECD). An OECD-led coalition of 44 countries is contemplating changes to long-standing international tax norms that determine each country’s right to tax cross-border transactions. These contemplated changes, if finalized and adopted by countries, would increase tax uncertainty and the risk of double taxation, thereby adversely affecting our provision for income taxes.

 

The recoverability of our deferred tax assets, which are predominantly in Brazil, Canada, Germany, Mexico and the US, is dependent upon our ability to generate future taxable income in these jurisdictions. In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions and a material assessment by a governing tax authority could affect our profitability and cash flows.

 

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 44 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 in which such event occurred.

 

Also, we are subject to risks related to such matters as product safety and quality; compliance with environmental, health and safety and food 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.

 

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 TIC Gums), 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.

 

Increased interest rates could increase our borrowing costs.

 

From time to time we may issue securities to finance acquisitions, capital expenditures, working capital and for other general corporate purposes. An increase in interest rates in the general economy could result in an increase in our borrowing costs for these financings, as well as under any existing debt that bears interest at an unhedged floating rate.

 

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

 

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

 

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

 

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

 

ITEM 1B.            UNRESOLVED STAFF COMMENTS

 

None

 

ITEM 2.               PROPERTIES

 

We own or lease (as noted below), directly and through our consolidated subsidiaries, 44 manufacturing facilities. 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:

 

 

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 our plants in London, Ontario, Canada; Stockton, California; Bedford Park, Illinois; Winston-Salem, North Carolina; San Juan del Rio and Mexico City, Mexico; Cali, Colombia; Cornwala, Pakistan; 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 Mexico City, Mexico; and Balsa Nova and Mogi-Guacu, Brazil locations, which are owned by, and operated pursuant to co-generation agreements with third parties.  We are constructing a co-generation facility at our plant in Cardinal, Ontario. 

 

In recent years, we have made significant capital expenditures to update, expand and improve our facilities, spending $284 million in 2016.  We believe these capital expenditures will allow us to operate efficient facilities for the foreseeable future.  We currently anticipate that capital expenditures for 2017 will approximate $300-$325 million.

 

ITEM 3.              LEGAL PROCEEDINGS

 

We are a 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, 2016 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 also routinely receive inquiries from regulators and other government authorities relating to various aspects of our business, including with respect to compliance with laws and regulations relating to the environment, and at any given time, we have matters at various stages of resolution with the applicable governmental authorities.  The outcomes of these matters are not within our complete control and may not be known for prolonged periods of time. We do not believe that the results of currently known legal proceedings and inquires, even if unfavorable to us, will be material to us.  There can be no assurance, however, that such claims, suits or investigations 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 4,446 at January 31, 2017.

 

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 market prices for our common stock and cash dividends declared per common share for 2015 and 2016 are shown below.

 

 

Issuer Purchases of Equity Securities:

 

The following table summarizes information with respect to our purchases of our common stock during the fourth quarter of 2016.

 

 

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.  At December 31, 2016, we have 4.7 million shares available for repurchase under the stock repurchase program.

 

ITEM 6.             SELECTED FINANCIAL DATA

 

Selected financial data is provided below.

 

 

 

 

 

 

 

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 44 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 return on capital employed and financial leverage to monitor our progress toward achieving our strategic business objectives (see section entitled “Key Financial Performance Metrics”).

 

We had a strong year in 2016 as net sales, operating income, net income and diluted earnings per common share grew from 2015.  This growth was driven principally by significantly improved operating results in our North America segment.  Operating income also grew in our Asia Pacific and EMEA segments, which was partially offset by lower results in our South America segment.  In North America, our largest segment, operating income for 2016 rose 27 percent principally driven by improved product price/mix and operating efficiencies in the segment.  South America operating income declined 12 percent in 2016 reflecting the difficult macroeconomic environment in the region.  Asia Pacific operating income grew 4 percent as volume growth and good cost control more than offset the impact of reduced product selling prices and local currency weakness in the segment.  Operating income in EMEA increased 14 percent driven by volume growth and lower raw material and energy costs, which more than offset the impact of local currency weakness in the segment.

 

Our operating cash flow rose to $771 million in 2016 from $686 million in 2015, and we continued to advance our Strategic Blueprint by investing in our business, growing our product portfolio and rewarding shareholders. 

 

On December 29, 2016, we acquired TIC Gums Incorporated (“TIC Gums”), a US-based company that provides advanced texture systems to the food and beverage industry.  Consistent with our Strategic Blueprint for growth, this acquisition enhances our texture capabilities and formulation expertise and provides additional opportunities for us to provide solutions for natural, organic and clean-label demands of our customers.  TIC Gums utilizes a variety of agriculturally derived ingredients, such as acacia gum and guar gum, to form the foundation for innovative texture systems and allow for clean-label reformulation.  TIC Gums operates two production facilities, one in Belcamp, Maryland and one in Guangzhou, China.  TIC Gums also maintains an R&D lab in each of these facilities.  We funded the $395 million acquisition with cash on hand and short-term borrowings. 

 

 

On November 29, 2016, we completed our acquisition of Shandong Huanong Specialty Corn Development Co., Ltd. (“Shandong Huanong”) in China for $12 million in cash.  The acquisition of Shandong Huanong, located in Shandong Province, adds a second manufacturing facility to our operations in China.  It produces starch raw material for our plant in Shanghai, which makes value-added ingredients for the food industry.  The transaction represents another step in executing our Strategic Blueprint for growth.  We expect it to enhance our capacity in the Asia-Pacific segment with a vertically integrated manufacturing base for specialty ingredients.  The acquisition did not have a material impact on our financial condition, results of operations or cash flows. 

On August 17, 2016, we announced that we entered into a definitive agreement to acquire the rice starch and rice flour business from Sun Flour Industry Co, Ltd. based in Banglen, Thailand.  This pending acquisition supports our global strategy to increase our specialty ingredients business and has been approved by our board of directors. This transaction should enhance our global supply chain and leverage other capital investments that we have made in Thailand to grow our specialty ingredients and service customers around the world.  The acquisition is subject to approval by Thailand government authorities as well as to other customary closing conditions.  The acquisition is not expected to have a material impact on our financial condition, results of operations or cash flows.

We also refinanced $350 million of term loan debt and entered into a new $1 billion revolving credit facility in 2016.  Additionally, we increased our quarterly cash dividend by 11 percent to $0.50 per share of common stock.

 

Looking ahead, we anticipate that our operating income and net income will grow in 2017 compared to 2016.  In North America, we expect operating income to increase driven by improved product mix and margins.  In South America, we expect another challenging year.  We believe that operating income will increase from 2016 despite continued slow economic growth and local foreign currency weakness.  We intend to continue to maintain a high degree of focus on cost and network optimization during 2017 as we manage through the difficult macroeconomic environment in this segment.  In the longer-term, we believe that the underlying business fundamentals for our South American segment are positive for the future and we believe that we are well-positioned to take advantage of an economic recovery when it materializes.  We expect operating income growth in Asia Pacific and EMEA in 2017, despite anticipated currency headwinds associated with a stronger US dollar.  We anticipate that this improvement will be driven primarily from growth in our specialty ingredient product portfolio and effective cost control.

 

We currently expect that our available cash balances, future cash flow from operations, access to debt markets 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 four reporting segments: 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 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.

 

We acquired Penford Corporation (“Penford”) and Kerr Concentrates, Inc. (“Kerr”) on March 11, 2015 and August 3, 2015, respectively.  The results of the acquired businesses are included in our consolidated financial results within the North America reporting segment from the respective acquisition dates forward.  While we identify significant fluctuations due to the acquisitions, our discussion below also addresses results of operations absent the impact of the acquisitions and the results of the acquired businesses, where appropriate, to provide a more comparable and meaningful analysis.

 

2016 Compared to 2015

 

Net Income attributable to Ingredion.  Net income attributable to Ingredion for 2016 increased to $485 million, or $6.55 per diluted common share, from $402 million, or $5.51 per diluted common share in 2015.   Our results for 2016 include a $27 million charge ($0.36 per diluted common share) for an income tax settlement (see Note 9 to the Consolidated Financial Statements for additional information), after-tax restructuring costs of $15 million ($0.20 per diluted common

share) consisting of employee severance-related charges and other costs associated with the execution of global IT outsourcing contracts, severance-related costs attributable to optimization initiatives in North America and South America and additional charges pertaining to our 2015 Port Colborne plant sale.  Additionally, our results for 2016 include after-tax costs of $2 million ($0.03 per diluted common share) associated with the integration of acquired operations.  Our results for 2015 included after-tax charges of $11 million ($0.15 per diluted common share) for impaired assets and restructuring costs in Brazil and Canada, after-tax restructuring charges of $7 million ($0.10 per diluted common share) for employee severance-related costs associated with the Penford acquisition, after-tax costs of $7 million ($0.10 per diluted common share) associated with the acquisition and integration of both Penford and Kerr, after-tax costs of $6 million ($0.09 per diluted common share) relating to the sale of Penford and Kerr inventory that was adjusted to fair value at the respective acquisition dates in accordance with business combination accounting rules, after-tax costs of $4 million ($0.06 per diluted common share) relating to a litigation settlement and an after-tax gain of $9 million ($0.12 per diluted common share) from the sale of our Port Colborne plant.  Without the income tax settlement charge, the restructuring, impairment and acquisition-related charges, the gain from the plant sale and the litigation settlement costs, our net income and diluted earnings per share would have grown 23 percent and 21 percent, respectively, from 2015.  These increases primarily reflect significantly improved operating income in North America and, to a lesser extent, in Asia Pacific and EMEA, as compared to 2015. 

 

Net Sales.  Net sales for 2016 increased to $5.70 billion from $5.62 billion in 2015.

 

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

 

 

The increase in net sales reflects price/product mix improvement of 5 percent partially offset by unfavorable currency translation of 4 percent due to the stronger US dollar.  Volume was flat. Organic volume declined approximately 2 percent primarily reflecting the impact of the Port Colborne plant sale.

 

Net sales in North America for 2016 increased 3 percent reflecting price/product mix improvement of 4 percent, partially offset by a 1 percent volume decline.  Organic volume declined 4 percent driven primarily by the impact of the Port Colborne plant sale.  In South America, net sales for 2016 were flat as unfavorable currency translation of 17 percent and a 5 percent volume reduction offset price/product mix improvement of 22 percent.  In Asia Pacific, net sales for 2016 decreased 3 percent as volume growth of 4 percent was more than offset by a 5 percent price/product mix decline due to the pass through of lower raw material costs in pricing to our customers and unfavorable currency translation of 2 percent.  EMEA net sales for 2016 increased 2 percent as volume growth of 6 percent more than offset unfavorable currency translation of 3 percent attributable to weaker local currencies and a 1 percent price/product mix reduction resulting from the pass through of lower corn costs in pricing to our customers. 

 

Cost of Sales.  Cost of sales for 2016 decreased 2 percent to $4.30 billion from $4.38 billion in 2015.  This reduction primarily reflects the effects of currency translation.  Gross corn costs per ton for 2016 increased approximately 3 percent from 2015, driven by higher market prices for corn.  Currency translation caused cost of sales for 2016 to decrease approximately 5 percent from 2015, reflecting the impact of the stronger US dollar.  Our gross profit margin for 2016 was 25 percent, compared to 22 percent in 2015.  This increase primarily reflects significantly improved gross profit margins in North America and, to a lesser extent, in Asia Pacific and EMEA.

 

Selling, General and Administrative Expenses.  Selling, general and administrative (“SG&A”) expenses for 2016 increased to $579 million from $555 million in 2015.  The increase primarily reflects higher compensation-related costs and incremental operating expenses of acquired operations.  Favorable translation effects associated with the stronger US dollar partially offset these increases.  Currency translation associated with weaker foreign currencies reduced SG&A expenses for 2016 by approximately 4 percent from 2015.  SG&A expenses represented 41 percent of gross profit in 2016,

as compared to 45 percent of gross profit in 2015. The decline reflects our continued focus on cost control and gross profit growth.

 

Other Income-net.  Other income-net of $4 million for 2016 increased from $1 million in 2015.

 

A summary of other income-net is as follows:

 

 

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

 

 

Operating income for 2016 increased to $808 million from $660 million in 2015.  Operating income for 2016 includes restructuring charges of $19 million consisting of $11 million of employee-related severance and other costs due to the execution of global IT outsourcing contracts, $6 million of employee-related severance costs associated with our optimization initiatives in North America and South America, and $2 million of costs attributable to the 2015 Port Colborne plant sale. Additionally, the 2016 results include $3 million of costs associated with our integration of acquired operations.  Operating income for 2015 included a $10 million gain from the sale of our Port Colborne plant, $12 million of charges for impaired assets and restructuring costs associated with our plant closings in Brazil, a restructuring charge of $12 million for estimated severance-related costs associated with the Penford acquisition, costs of $7 million relating to a litigation settlement, a $4 million restructuring charge for estimated severance-related expenses and other costs associated with the sale of the Port Colborne plant, and $10 million of other costs associated with the acquisitions and integration of the Penford and Kerr businesses.  Additionally, the 2015 results included $10 million of costs associated with the sale of Penford and Kerr inventory that was marked up to fair value at the acquisition date in accordance with business combination accounting rules.  Without the restructuring / impairment charges, acquisition-related expenses, litigation settlement costs and gain from the plant sale, operating income for 2016 would have grown 18 percent from 2015.  This increase primarily reflects operating income growth in North America and, to a lesser extent, in EMEA and Asia Pacific.  Unfavorable currency translation attributable to the stronger US dollar negatively impacted operating income by approximately $17 million as compared to 2015.  Our product pricing actions helped to mitigate the unfavorable impact of currency translation.

 

North America operating income increased 27 percent to $610 million from $479 million in 2015.  Earnings contributed by the acquired operations represented approximately 2 percentage points of the increase.  The remaining organic operating income improvement of 25 percent for 2016 was driven principally by improved product price/mix and

operating efficiencies in the segment.  Our North American results included business interruption insurance recoveries of $7 million in both 2016 and 2015 relating to the reimbursement of costs in those years.  Translation effects associated with a weaker Canadian dollar negatively impacted operating income by approximately $4 million in the segment.  South America operating income decreased 12 percent to $89 million from $101 million in 2015.  The decrease reflects lower earnings in the Southern Cone region of South America, which more than offset earnings growth in the rest of the segment.  Improved product selling prices were not enough to offset higher local production costs, reduced volume attributable to the difficult macroeconomic environment (particularly in the Southern Cone) and unfavorable impacts of currency devaluations.  Translation effects associated with weaker South American currencies (particularly the Colombian Peso and Brazilian Real) negatively impacted operating income by approximately $6 million.  We anticipate that our business in South America will continue to be challenged by difficult economic conditions and we continue to assess various strategic options to better optimize our business and improve performance in South America.  Implementation of certain of these options could result in future asset impairment charges in the segment.  Asia Pacific operating income increased 4 percent to $111 million from $107 million in 2015.  Volume growth and good cost control more than offset the impact of reduced product selling prices and local currency weakness in the segment.  Translation effects associated with weaker Asia Pacific currencies negatively impacted operating income by approximately $3 million in the segment.  EMEA operating income grew 14 percent to $106 million from $93 million in 2015.  The increase was driven by volume growth and lower raw material and energy costs, which more than offset the impact of local currency weakness in the segment.  Translation effects primarily associated with the weaker British Pound Sterling and Pakistan Rupee had an unfavorable impact of approximately $4 million on operating income in the segment.  An increase in corporate expenses primarily reflects increased variable compensation and continued investments in our administrative processes.

 

Financing Costs-net.  Financing costs-net increased to $66 million in 2016 from $61 million in 2015.  The increase primarily reflects reduced interest income due to lower average cash balances and short-term investment rates and an increase in interest expense driven by higher weighted average borrowing costs that more than offset the impact of reduced average debt balances. A decline in foreign currency transaction losses partially offset these increases. 

 

Provision for Income Taxes.  Our effective tax rate was 33.1 percent in 2016, as compared to 31.2 percent in 2015. 

 

We have been pursing relief from double taxation under the US and Canadian tax treaty for the years 2004-2013.  During the 4th quarter of 2016, a tentative agreement was reached between the US and Canada for the specific issues being contested.   We established a net reserve of $24 million or 3.2 percentage points on the effective tax rate in 2016.  In addition, as a result of the settlement, for the years 2014-2016, we have established a net reserve for $7 million or 1.0 percentage points on the effective tax rate in 2016. Of this amount, $4 million pertains to 2016.

 

We use the US dollar as the functional currency for our subsidiaries in Mexico.  Because of the continued decline in the value of the Mexican peso versus the US dollar, our tax provision for 2016 and 2015 was increased by $18 million or 2.4 percentage points and $17 million, or 2.9 percentage points, respectively.  A primary cause was foreign currency translation 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. 

 

During 2016 we recorded a valuation allowance on the net deferred tax assets of a foreign subsidiary in the amount of $7 million or 1.0 percentage points on the effective tax rate in 2016.  In addition, we accrued taxes on unremitted earnings of foreign subsidiaries in the amount of $3.7 million or 0.5 percentage points on the effective rate in 2016.

 

The above items were partially offset in 2016 by $2 million, or 0.3 percentage points of net favorable reversals of previously unrecognized tax benefits.  In addition, foreign tax credits increased in the amount of $22 million or 3.0 percentage points.    Finally, in the second quarter of 2016, we elected to early adopt ASU No. 2016-09, related to stock compensation.   The new guidance requires excess tax benefits and tax deficiencies to be recorded in the provision for income taxes when stock options are exercised or restricted shares and performance shares vest.  Our 2016 tax provision includes a tax benefit of $12 million, or 1.6 percentage points, related to the adoption of this standard. 

 

Based on the final settlement of an audit matter, in 2015 we reversed $4 million of the $7 million income tax expense and other income that was recorded in 2014.  As a result, our effective income tax rate for 2015 was reduced by 0.7

percentage points.  Substantial portions of the sale of Port Colborne, Canada, assets resulted in favorable tax treatment that reduced the effective tax rate by approximately 0.4 percentage points.  Additionally, the 2015 tax provision includes $2 million of net favorable reversals of previously unrecognized tax benefits due to the lapsing of the statute of limitations, which reduced the effective tax rate by 0.3 percentage points.

 

Without the impact of the items described above, our effective tax rates for 2016 and 2015 would have been approximately 30 percent and 29.7 percent, respectively. 

 

We have significant operations in the US, Canada, Mexico and Pakistan where the statutory tax rates, including local income taxes are approximately 37 percent, 25 percent, 30 percent and 31 percent in 2016, respectively.  In addition, our subsidiary in Brazil has a statutory tax rate of 34 percent, before local incentives that vary each year.

 

Net Income Attributable to Non-controlling Interests.  Net income attributable to non-controlling interests was $11 million in 2016, up from $10 million in 2015.  The increase primarily reflects improved net income at our non-wholly-owned operation in Pakistan.

 

Comprehensive Income.  We recorded comprehensive income of $505 million in 2016, as compared with $82 million in 2015.  The increase in comprehensive income primarily reflects a $331 million favorable variance in the foreign currency translation adjustment and our net income growth.  The favorable variance in the foreign currency translation adjustment reflects a moderate strengthening in end of period foreign currencies relative to the US dollar, as compared to the year-ago period when end of period foreign currencies had substantially weakened. 

 

2015 Compared to 2014

 

Net Income attributable to Ingredion.  Net income attributable to Ingredion for 2015 increased to $402 million, or $5.51 per diluted common share, from $355 million, or $4.74 per diluted common share in 2014.  Our results for 2015 include after-tax charges of $11 million ($0.15 per diluted common share) for impaired assets and restructuring costs in Brazil and Canada, after-tax restructuring charges of $7 million ($0.10 per diluted common share) for employee severance-related costs associated with the Penford acquisition, after-tax costs of $7 million ($0.10 per diluted common share) associated with the acquisition and integration of both Penford and Kerr, after-tax costs of $6 million ($0.09 per diluted common share) relating to the sale of Penford and Kerr inventory that was adjusted to fair value at the respective acquisition dates in accordance with business combination accounting rules, after-tax costs of $4 million ($0.06 per diluted common share) relating to a litigation settlement and an after-tax gain of $9 million ($0.12 per diluted common share) from the sale of our Port Colborne plant.  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 5 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 then-pending acquisition of Penford.  Without the gain from the plant sale, the litigation settlement costs and the impairment, restructuring and acquisition-related charges, our net income and diluted earnings per share would have grown 10 percent and 13 percent, respectively, from 2014.  These increases primarily reflect significantly improved operating income in North America for 2015, as compared to 2014.  Our improved diluted earnings per common share for 2015 also reflects the favorable impact of our share repurchases.

 

Net Sales.  Net sales for 2015 decreased to $5.62 billion from $5.67 billion in 2014.

 

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

 

 

The businesses acquired from Penford and Kerr contributed $328 million of net sales in 2015.  The decrease in net sales primarily reflects unfavorable currency translation of 9 percent due to the stronger US dollar, which more than offset volume growth of 7 percent that was driven mainly by the operations of the acquired businesses and price/product mix improvement of 1 percent.  The pass through of lower raw material costs (primarily corn) in our product pricing is reflected in the modest price/product mix improvement.  Of the 7 percent volume increase, 1 percent represented organic volume growth.

 

Net sales in North America increased 8 percent, primarily reflecting volume growth of 12 percent driven largely by the addition of the acquired businesses, which more than offset a 2 percent price/product mix decline driven principally by lower raw material costs and unfavorable currency translation of 2 percent attributable to a weaker Canadian dollar.  Organic volume grew 1 percent.  Net sales in South America declined 16 percent, as a 26 percent decline attributable to weaker foreign currencies more than offset price/product mix improvement of 10 percent.  Volume in the segment was flat.  Asia Pacific net sales decreased 8 percent, as unfavorable currency translation of 7 percent and a 3 percent price/product mix decline, more than offset volume growth of 2 percent.  EMEA net sales fell 8 percent, reflecting unfavorable currency translation of 9 percent, primarily attributable to the weaker Euro and British Pound Sterling.  Volume grew 1 percent.  Price/product mix in the segment was flat.

 

Cost of Sales.  Cost of sales for 2015 decreased 4 percent to $4.38 billion from $4.55 billion in 2014.  This reduction primarily reflects lower raw material costs and the effects of currency translation.  Gross corn costs per ton for 2015 decreased approximately 13 percent from 2014, driven by lower market prices for corn.  Currency translation caused cost of sales for 2015 to decrease approximately 10 percent from 2014, reflecting the impact of the stronger US dollar.  Our gross profit margin for 2015 was 22 percent, compared to 20 percent in 2014.  Despite reduced selling prices driven by lower corn costs, we have generally maintained per unit gross profit levels in US dollars, resulting in the improved gross profit margin percentages.

 

Selling, General and Administrative Expenses.  Selling, general and administrative (“SG&A”) expenses for 2015 increased to $555 million from $525 million in 2014.  The increase primarily reflects incremental operating expenses of the acquired businesses as well as other costs associated with the acquisition and integration of those businesses.  Favorable translation effects associated with the stronger US dollar more than offset higher compensation-related and various other costs.  Currency translation associated with weaker foreign currencies reduced SG&A expenses for 2015 by approximately 8 percent from 2014.  SG&A expenses represented 45 percent of gross profit in 2015, as compared to 47 percent of gross profit in 2014.

 

Other Income-net.  Other income-net of $1 million for 2015 decreased from other income-net of $24 million in 2014.  The decrease for 2015 primarily reflects $7 million of costs relating to a litigation settlement and an $11 million unfavorable swing from $7 million of income in 2014 to $4 million of expense in 2015 associated with a tax indemnification agreement relating to a subsidiary acquired from Akzo Nobel N.V. (“Akzo”) in 2010.  In 2014, we recognized a charge to our income tax provision for an expected unfavorable income tax audit result at this subsidiary related to a pre-acquisition period for which we are indemnified by Akzo.  The costs incurred by the acquired subsidiary were recorded in our provision for income taxes while the reimbursement from Akzo under the indemnification agreement was recorded as other income.  In 2015, based upon the final settlement of the matter, we determined that the unfavorable income tax audit amount should be reduced from $7 million to $3 million.  Accordingly, in 2015, we recognized a $4 million income tax benefit and a charge to other income-net of $4 million to reduce our receivable from Akzo associated with the indemnification agreement.  The impact on our net income for 2015 and 2014 is zero.  Other income-net for 2015 also included a $10 million gain from the sale of the Port Colborne plant.

 

A summary of other income-net is as follows:

 

 

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

 

 

Operating income for 2015 increased to $660 million from $581 million in 2014.  Operating income for 2015 included a $10 million gain from the sale of our Port Colborne plant, $12 million of charges for impaired assets and restructuring costs associated with our plant closings in Brazil, a restructuring charge of $12 million for estimated severance-related costs associated with the Penford acquisition, costs of $7 million relating to a litigation settlement, a $4 million restructuring charge for estimated severance-related expenses and other costs associated with the sale of the Port Colborne plant, and $10 million of other costs associated with the acquisitions and integration of the Penford and Kerr businesses.  Additionally, the 2015 results included $10 million of costs associated with the sale of Penford and Kerr inventory that was marked up to fair value at the acquisition date in accordance with business combination accounting rules.  Operating income for 2014 included 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 then-pending acquisition of Penford.  Without the gain from the plant sale, the litigation settlement costs and the restructuring, impairment and acquisition-related charges, operating income for 2015 would have grown 14 percent from 2014.  This increase primarily reflects significantly improved operating income in North America compared to the weaker results of 2014.  Unfavorable currency translation attributable to the stronger US dollar negatively impacted operating income by approximately $68 million as compared to 2014.  Our product pricing actions helped to mitigate the unfavorable impact of currency translation.

 

North America operating income increased 28 percent to $479 million from $375 million in 2014.  Earnings contributed by the acquired operations represented approximately 6 percentage points of the increase.  The remaining organic operating income improvement of 22 percent for 2015 primarily reflects more normal weather conditions, organic volume growth and lower corn, energy and other manufacturing costs.  Our North American results for 2015 also included $7 million of business interruption insurance recoveries related to the prior year’s weather.  Our 2014 results

were negatively impacted by harsh winter weather conditions that caused high energy, transportation and production costs.  Translation effects associated with a weaker Canadian dollar unfavorably impacted operating income by approximately $13 million in the segment.  South America operating income decreased 6 percent to $101 million from $108 million in 2014.  The decline primarily reflects weaker results in Brazil driven principally by local currency weakness.  Improved selling prices for our products helped to partially offset the unfavorable impacts of currency devaluation and higher local production costs in the segment.  Translation effects associated with weaker South American currencies (particularly the Brazilian Real, Colombian Peso and the Argentine Peso) negatively impacted operating income by approximately $36 million.  We currently anticipate that our business in South America will continue to be challenged by difficult economic conditions in 2016.  Asia Pacific operating income grew 4 percent to $107 million from $103 million in 2014.  Volume growth and lower raw material costs helped to mitigate the impact of local currency weakness in the segment.  Translation effects associated with weaker Asia Pacific currencies negatively impacted operating income by approximately $9 million in the segment.  EMEA operating income declined 2 percent to $93 million from $95 million in 2014.  This decrease primarily reflects the impact of currency translation.  Cost reductions and improved sales volumes helped to partially offset this unfavorable impact.  Additionally, the prior year results included a $3 million gain from the sale of an idled plant in Kenya.  Translation effects primarily associated with the weaker Euro and British Pound Sterling had an unfavorable impact of $10 million on operating income in the segment.  An increase in corporate expenses was driven by an adjustment with respect to the previously-mentioned Akzo tax indemnification that unfavorably impacted operating income by $11 million for 2015, as compared to 2014.

 

Financing Costs-net.  Financing costs-net was $61 million in 2015, consistent with 2014.  Lower interest expense and higher interest income were offset by a $5 million increase in foreign currency transaction losses.  The reduction in interest expense reflects lower average interest rates driven by the effect of our interest rate swaps and our low-rate term loan borrowing that we arranged in 2015, which more than offset the impact of higher average borrowings.  The increase in interest income was driven primarily by higher average cash balances.  The increase in foreign currency transaction losses primarily reflects the impact of the December devaluation of the Argentine peso.  Hedge costs spiked in December and prevented hedges from offsetting the impact of the devaluation, negatively affecting Argentine peso denominated assets.

 

Provision for Income Taxes.  Our effective tax rate was 31.2 percent in 2015, as compared to 30.2 percent in 2014.  We use the US dollar as the functional currency for our subsidiaries in Mexico.  Because of the continued decline in the value of the Mexican peso versus the US dollar, our tax provision for 2015 was increased by $17 million, or 2.9 percentage points.  A primary cause was 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.  Based on the final settlement of an audit matter, in 2015 we reversed $4 million of the $7 million income tax expense and other income that was recorded in 2014 (see also discussion of Other Income-net presented earlier in this section).  As a result, our effective income tax rate for 2015 was reduced by 0.7 percentage points.  Substantial portions of the sale of Port Colborne, Canada, assets resulted in favorable tax treatment that reduced the effective tax rate by approximately 0.4 percentage points.  Additionally, the 2015 tax provision included $2 million of net favorable reversals of previously unrecognized tax benefits due to the lapsing of the statute of limitations, which reduced the effective tax rate by 0.3 percentage points.

 

In the fourth quarter of 2014 we determined that goodwill in our Southern Cone subsidiaries was impaired and recorded a charge of $33 million without a tax benefit, which increased the 2014 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 was increased by 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 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.

 

Without the impact of the items described above, our effective tax rates for 2015 and 2014 would have been approximately 29.7 percent and 28.1 percent, respectively.  See Note 9 of the notes to the consolidated financial statements for additional information.

 

We have significant operations in the US, Canada, Mexico and Thailand where the statutory tax rates, including local income taxes are approximately 37 percent, 25 percent, 30 percent and 20 percent in 2015, respectively.  In addition, our subsidiary in Brazil has a statutory tax rate of 34 percent, before local incentives that vary each year.

 

Net Income Attributable to Non-controlling Interests.  Net income attributable to non-controlling interests was $10 million in 2015, up from $8 million in 2014.  The increase primarily reflects improved net income at our non-wholly-owned operation in Pakistan.

 

Comprehensive Income.  We recorded comprehensive income of $82 million in 2015, as compared with $156 million in 2014.  The decrease in comprehensive income primarily reflects a $112 million unfavorable variance in the currency translation adjustment, which more than offset our net income growth.  The unfavorable variance in the currency 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, 2016, our total assets were $5.78 billion, as compared to $5.07 billion at December 31, 2015.  The increase was driven principally by our net income growth and the impact of the TIC Gums acquisition.  Total equity increased to $2.60 billion at December 31, 2016, from $2.18 billion at December 31, 2015.  This increase primarily reflects our earnings growth and, to a lesser extent, the issuance of common stock associated with the exercise of stock options. 

 

On October 11, 2016, we entered into a new five-year, senior, unsecured, $1 billion revolving credit agreement (the “Revolving Credit Agreement”) that replaced our previously existing $1 billion senior unsecured revolving credit facility that would have matured on October 22, 2017.  See also Note 7 of the Notes to the Consolidated Financial Statements. 

 

Subject to certain terms and conditions, the Company may increase the amount of the revolving facility under the Revolving Credit Agreement by up to $500 million in the aggregate.  The Company may also obtain up to two one-year extensions of the maturity date of the Revolving Credit Agreement at its requests and subject to the agreement of the lenders.  All committed pro rata borrowings under the revolving facility will bear interest at a variable annual rate based on the LIBOR or base rate, at the Company’s election, subject to the terms and conditions thereof, plus, in each case, an applicable margin based on the Company’s leverage ratio (as reported in the financial statements delivered pursuant to the Revolving Credit Agreement) or the Company’s credit rating.  Subject to specified conditions, the Company may designate one or more of its subsidiaries as additional borrowers under the Revolving Credit Agreement provided that the Company guarantees all borrowings and other obligations of any such subsidiaries thereunder.

 

The Revolving Credit Agreement contains customary representations, warranties, covenants, events of default and other terms and conditions, including limitations on liens, incurrence of subsidiary debt and mergers.  The Company must also comply with a leverage ratio covenant 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, 2016. At December 31, 2016, there were no borrowings outstanding under our Revolving Credit Agreement, as compared to $111 million outstanding at December 31, 2015 under our previously-existing $1 billion revolving credit facility.  In addition, we have a number of short-term credit facilities consisting of operating lines of credit outside of the United States.

 

On September 22, 2016, we issued 3.20 percent Senior Notes due October 1, 2026 in an aggregate principal amount of $500 million.  The net proceeds from the sale of the notes of approximately $497 million were used to repay $350 million of term loan debt, to repay $52 million of borrowings under our previously existing $1 billion revolving credit facility and for general corporate purposes.  See also Note 7 of the Notes to the Consolidated financial statements.

 

On July 10, 2015, we entered into a Term Loan Credit Agreement to establish an 18-month, $350 million multi-currency senior unsecured term loan credit facility.  All borrowings under the term loan facility incurred interest at a variable annual rate based on the LIBOR or base rate, at our election, subject to the terms and conditions thereof, plus, in each case, an applicable margin.  Proceeds of $350 million from the Term Loan Credit Agreement were used to repay borrowings outstanding under our previously-existing $1 billion revolving credit facility.  The $350 million of term loan borrowings were repaid in September 2016 with proceeds from our 3.20 percent Senior Notes offering discussed above.

 

On November 2, 2015, we repaid our $350 million of 3.2 percent senior notes at the maturity date with proceeds from our previously-existing $1 billion revolving credit facility and cash on hand.

 

At December 31, 2016, we had total debt outstanding of $1.96 billion, compared to $1.84 billion at December 31, 2015.  At December 31, 2016 our total debt consisted of the following:

 

 

As noted above, we have $200 million of 6.0 percent Senior Notes that mature on April 15, 2017 and $300 million (face amount) of 1.8 percent Senior Notes that mature on September 25, 2017.  These borrowings are included in long-term debt in our Consolidated Balance Sheet as we have the ability and intent to refinance them on a long-term basis prior to the maturity dates.    

 

Ingredion Incorporated, as the parent company, guarantees certain obligations of its consolidated subsidiaries.  At December 31, 2016, such guarantees aggregated $121 million.  Management believes that such consolidated subsidiaries will meet their financial obligations as they become due.

 

Historically, the principal source of our liquidity has been our internally generated cash flow, which we supplement as necessary with our ability to borrow on our bank lines and to raise funds in the capital markets.  In addition to borrowing availability under our Revolving Credit Agreement, we also have approximately $443 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 4.0 percent and 3.4 percent for 2016 and 2015, respectively.

 

Net Cash Flows

 

A summary of operating cash flows is shown below:

 

 

Cash provided by operations was $771 million in 2016, as compared with $686 million in 2015.  The increase in operating cash flow primarily reflects our net income growth.    

 

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 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.  Additionally, we enter into futures contracts to hedge price risk associated with fluctuations in market prices of ethanol.  As the market price of these commodities fluctuate, our derivative instruments change in value and we fund any unrealized losses or receive cash for any unrealized gains related to outstanding commodity futures and option contracts.  We plan to continue to use derivative instruments to hedge such price risk 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 of the underlying commodity.

 

Listed below are our primary investing and financing activities for 2016:

 

 

On December 9, 2016, our board of directors declared a quarterly cash dividend of $0.50 per share of common stock.  This dividend was paid on January 25, 2017 to stockholders of record at the close of business on December 31, 2016.

 

We currently anticipate that capital expenditures for 2017 will approximate $300 million to $325 million.

 

On December 29, 2016, we acquired TIC Gums, a US-based company that provides advanced texture systems to the food and beverage industry.  Consistent with our Strategic Blueprint for growth, this acquisition enhances our texture capabilities and formulation expertise and provides additional opportunities for us to provide solutions for natural, organic and clean-label demands of our customers.  TIC Gums utilizes a variety of agriculturally derived ingredients, such as acacia gum and guar gum, to form the foundation for innovative texture systems and allow for clean-label reformulation.  TIC Gums operates two production facilities, one in Belcamp, Maryland and one in Guangzhou, China.  TIC Gums also maintains an R&D lab in each of these facilities.  We funded the $395 million acquisition with cash and short-term borrowings.