INGREDION INCORPORATED Overview
We are a major supplier of high-quality food and industrial ingredient solutions to customers around the world. We have 46 manufacturing facilities located inNorth America ,South America ,Asia-Pacific andEurope , theMiddle East andAfrica ("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, brewing, and animal feed industries, among others. Our strategic growth roadmap is based on five growth platforms and is designed to deliver shareholder value by accelerating customer co-creation and enabling consumer-preferred innovation. Our first platform is starch-based texturizers, the second platform is clean and simple ingredients, the third platform is plant-based proteins, the fourth platform is sugar reduction and specialty sweeteners, and finally, our fifth platform is value-added food systems. Critical success factors in our business include managing our manufacturing costs, including costs for corn, other raw materials, and utilities. In addition, our global operations expose us to fluctuations in foreign currency exchange rates. We use derivative financial instruments, when appropriate, for the purpose of minimizing the risks and costs associated with fluctuations in certain raw material and energy costs, foreign exchange rates, and interest rates. 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 to expand through strategic acquisitions and alliances. We utilize certain key financial metrics relating to return on invested capital and financial leverage to monitor our progress toward achieving our strategic business objectives (see section entitled "Key Financial Performance Metrics"). For the year endedDecember 31, 2020 , operating income, net income, and diluted earnings per common share declined from 2019 levels. The decreases were attributable primarily to reductions in volumes driven by government-mandated shutdowns associated with COVID-19, particularly in theAmericas , increased restructuring and impairment charges associated with the impairments of an indefinite-lived intangible asset and an equity method investment, and the results of the acquired operations of PureCircle Limited ("PureCircle"). The declines were partially offset by the benefit from Brazilian tax matters. COVID-19: Our operations in recent periods have been adversely affected by impacts of COVID-19. OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic, and onMarch 13, 2020 the United States declared a national emergency with respect to COVID-19. Our global operations expose us to risks associated with public health crises, including pandemics such as COVID-19. Foreign governmental organizations and governmental organizations at the national, state and local levels inthe United States have taken various actions to combat the spread of COVID-19, including imposing stay-at-home orders and closing "non-essential" businesses and their operations. As a manufacturer of food ingredients, our operations are considered "essential" under most current COVID-19 government regulations, and our facilities are operating globally. We did not experience any material supply chain interruptions during the twelve months endedDecember 31, 2020 and were able to continue to operate and ship products from our global network of manufacturing facilities without material interruptions. We experienced sales volume decline in the second and third quarters of 2020 due to COVID-19 impacts on consumer mobility and consumption. We place top priority on our employees' health and safety and continue to follow the advice and the guidelines of public health authorities for physical distancing and to make available personal protective equipment and sanitization supplies.
The Company anticipates continued impacts from COVID-19 on net sales volume across our operating segments in the first quarter of 2021. We are monitoring COVID-19 infection rates as well as the pace and effectiveness of vaccination rollouts, as the net sales volume is generally correlated with increased consumer activity and availability of food and beverages consumed away from
home.
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Restructuring and Impairment Charges: In July 2018 , we announced a $125 million
savings target for our Cost Smart program, designed to improve profitability,
further streamline our global business, and deliver increased value to
stockholders. We set Cost Smart savings targets to include an anticipated $75
million in Cost of sales savings, including freight, and $50 million in
anticipated SG&A savings by year-end 2021. Since the program's inception, we
have periodically updated our savings targets and we now expect to deliver $170
million in total savings by year-end 2021.
Our Cost Smart program and other initiatives resulted in restructuring charges
in 2020. For the year ended December 31, 2020 , we recorded a total of $48
million of pre-tax restructuring charges related to these programs, a decrease
of $9 million from the restructuring charges recorded for 2019. We recorded $25
million of restructuring charges for our Cost Smart SG&A program, primarily
related to professional service costs in North America during the year, and $23
million of restructuring charges for our Cost Smart Cost of sales program,
primarily related to facility and product line closures during the year.
During the year ended December 31, 2020 , we also recorded $45 million of pre-tax
impairment charges, including a $35 million charge related to an impairment of
our indefinite-lived intangible asset associated with the TIC Gums tradename and
a $10 million other-than-temporary impairment of our equity method investment in
Verdient Foods Inc ("Verdient).
Storm Damage Costs: We incurred storm damage to the Cedar Rapids, Iowa
manufacturing facility, which was shut down for ten days in August 2020 . The
storm-related damage resulted in $3 million of charges during the twelve months
ended December 31, 2020 . We recorded the storm damage costs within Other expense
(income), net on the Condensed Consolidated Statements of Income.
Liquidity and Capital Resources: Our cash provided by operating activities
increased to $829 million for the year ended December 31, 2020 , from $680
million in the prior year primarily due to changes in working capital. Our cash
used by investing activities increased to $571 million for the year ended
December 31, 2020 , from $374 million in the prior year primarily due to the
acquisition of a controlling interest in PureCircle. Our cash provided by
financing activities was $143 million during the year ended December 31, 2020 ,
while our cash used for financing activities was $364 million for the year ended
December 31, 2019 . This change was primarily due to our sale of $1 billion of
senior notes during the year ended December 31, 2020 , offset by payments ondebt maturities during the year.
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 financing activities for at least the next 12 months and for the foreseeable future thereafter. Our future cash flow needs will depend on many factors, including our rate of revenue growth, the timing and extent of our expansion into new markets, the timing of introductions of new products, potential acquisitions of complementary businesses and technologies, continuing market acceptance of our new products, and general economic and market conditions. We may need to raise additional capital or incur indebtedness to fund our needs for less predictable strategic initiatives, such as acquisitions. 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 intoU.S. dollars at the applicable average exchange rates for the period. Fluctuations in foreign currency exchange rates affect theU.S. dollar amounts of our foreign subsidiaries' revenues and expenses. We acquired a controlling interest in PureCircle onJuly 1, 2020 , acquired Verdient onNovember 3, 2020 , andWestern Polymer LLC ("Western Polymer") onMarch 1, 2019 . The results of the acquired businesses are included in our consolidated financial results from the respective acquisition dates forward. While we identify fluctuations due to the acquisitions, our discussion below also addresses results of operations excluding the impact of the acquisitions and the results of the acquired businesses, where appropriate, to provide a more comparable and meaningful analysis. 32
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2020 Compared to 2019 - Consolidated
Favorable Favorable
Year Ended December 31, (Unfavorable) (Unfavorable)
(in millions) 2020 2019 Variance Percentage
Net sales $ 5,987 $ 6,209 $ (222) (4) %
Cost of sales 4,715 4,897 182 4 %
Gross profit 1,272 1,312 (40) (3) %
Operating expenses 628 610 (18) (3) %
Other income, net (31) (19) 12 63 %Restructuring/impairment charges 93 57
(36) (63) %
Operating income 582 664 (82) (12) %
Financing costs, net 81 81 - - %
Other, non-operating expense/(income),
net (5) 1 6 600 %
Income before income taxes 506 582 (76) (13) %
Provision for income taxes 152 158 6 4 %
Net income 354 424 (70) (17) %
Less: Net income attributable to
non-controlling interests 6 11 5 45 %
Net income attributable to Ingredion $ 348 $ 413 $ (65) (16) %
Net Income attributable to Ingredion. Net income attributable to Ingredion for 2020 decreased to$348 million from$413 million in 2019. The decrease in net income was largely attributable to lower sales volumes inNorth America , increased restructuring and impairment charges primarily related to impairments of an indefinite-lived intangible asset and an other-than-temporary impairment of our equity method investment in Verdient, and the inclusion of the results of the acquired operations of PureCircle. These effects were partially offset by an increased benefit from the Brazilian tax matter compared to 2019. Net sales. Net sales were down 4 percent for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The decrease in full-year net sales was driven by sales volume declines inNorth America andSouth America , related primarily to COVID-19 shutdowns in the second and third quarters.
Cost of sales. Cost of sales for the year ended
Our
gross profit margin was flat at 21 percent for the years ended
Operating expenses. Operating expenses increased 3 percent for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The increase was primarily driven by higher corporate costs due to continued investments to drive business and digital transformations. Operating expenses, as a percentage of gross profit, were 49 percent for the year endedDecember 31, 2020 , as compared to 46 percent for the year endedDecember 31, 2019 . 33 Table of Contents
Other income, net. Our change in other income, net for the year ended
Year Ended December 31, Favorable (Unfavorable)
(in millions) 2020 2019 Variance
Brazil tax matters $ (36) $ (22) $ 14
Other 5 3 (2)Other (income) expense, net$ (31) $ (19) $
12
In 2019 the Company received a favorable judgment from theFederal Court of Appeals inBrazil related to certain indirect taxes collected in prior years. To account for the judgment, the Company recorded a$22 million pre-tax benefit, in accordance with ASC 450, Contingencies, for the three and twelve months endedDecember 31, 2019 . In 2020, the Company received another favorable court judgment that further clarifies the calculation of the Company's benefit, resulting in a larger indirect tax claim against the government. As a result, the Company recorded an additional$35 million in pre-tax benefits during the three and twelve months endedDecember 31, 2020 . The Company expects to be entitled to credits against its Brazilian federal tax payments in 2021 and future years. The total benefit recorded represents the Company's current estimate of the credits and interest due from the favorable decisions in accordance with ASC 450, Contingencies. Additionally, during the twelve months endedDecember 31, 2020 , the Company recorded a pre-tax benefit of$1 million related to the reversal of a tax decision on a government subsidy on which the Company had previously paid taxes. The Company also recorded a$3 million tax provision benefit related to this decision.
Financing costs, net. Our financing costs, net for the year ended
Provision for income taxes. Our effective income tax rates for the years ended
The increase in the effective income tax rate was driven by a change in the mix of earnings, including the consolidation of PureCircle, certain one-time items in the year-over-year results and, a decline in the value of the Mexican peso against theU.S. dollar. These items were partially offset by a reduction in ourU.S. global intangible low-taxed income ("GILTI") in accordance with final regulations issued by theU.S. Treasury Department under the TCJA and utilization of previously unbenefited net operating losses compared to a valuation allowance build in the year-ago period. Net income attributable to non-controlling interests. Net income attributable to non-controlling interests for the year endedDecember 31, 2020 , decreased by 45 percent compared to the year endedDecember 31, 2019 . The decrease was attributable to net losses associated with the acquisition of a controlling interest in PureCircle.
2020 Compared to 2019 -
Favorable Favorable
Year Ended December 31, (Unfavorable) (Unfavorable)
(in millions) 2020 2019 Variance PercentageNet sales to unaffiliated customers$ 3,662 $ 3,834 $
(172) (4) %
Operating income 487 522 (35) (7) %
Net sales. Our decrease in net sales of 4 percent for the year ended December
31, 2020 , as compared to the year ended December 31, 2019 , was driven by a 5
percent decrease in volume, partially offset by a 1 percent improvement in
price/product mix.
Operating income. Our operating income decreased $35 million for the year ended
December 31, 2020 , as compared to the year ended December 31, 2019 . The decrease
was driven by significantly lower away-from-home food and beverage consumption
across the region and a government-mandated shutdown of brewery customers in
Mexico in
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the second quarter related to COVID-19 impacts, partially offset by lower net corn costs and favorable price mix in the fourth quarter.
2020 Compared to 2019 -
Favorable Favorable
Year Ended December 31, (Unfavorable) (Unfavorable)
(in millions) 2020 2019 Variance PercentageNet sales to unaffiliated customers$ 919 $ 960 $
(41) (4) %
Operating income 112 96 16 17 %
Net sales. Our decrease in net sales of 4 percent for the year ended December
31, 2020 , as compared to the year ended December 31, 2019 , was driven by a
decrease in foreign currency values against the U.S. dollar of 15 percent and a
1 percent decrease in volume, partially offset by a 12 percent increase in
price/product mix.
Operating income. Our increase in operating income of $16 million for the year
ended December 31, 2020 , as compared to the year ended December 31, 2019 , was
due to strong price mix, which was partially offset by unfavorable foreign
currency impacts and lower sales volumes.
2020 Compared to 2019 -
Favorable Favorable
Year Ended December 31, (Unfavorable) (Unfavorable)
(in millions) 2020 2019 Variance PercentageNet sales to unaffiliated customers$ 813 $ 823 $
(10) (1) %
Operating income 80 87 (7) (8) %
Net sales. Our decrease in net sales of 1 percent for the year ended
Operating income. Our decrease in operating income of$7 million for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 , was driven by inclusion of PureCircle results, which reduced full-year operating income by$11 million . 2020 Compared to 2019 - EMEA Favorable Year Ended December 31, Favorable (Unfavorable) (Unfavorable) (in millions) 2020 2019 Variance Percentage
Net sales to unaffiliated customers$ 593 $ 592 $
1 - %
Operating income 102 99 3 3 %
Net sales. Our net sales were essentially flat for the year ended
Operating income. Operating income increased by$3 million for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . The increase was largely attributable toPakistan pricing actions, strong EMEA specialty sales, and lower operating expenses inEurope . These effects were partially offset by the impacts of stay-at-home orders onPakistan sales volume in the first half of the year and negativePakistan foreign currency impacts 35 Table of Contents
2019 Compared to 2018 - Consolidated
Favorable Favorable
Year Ended December 31, (Unfavorable) (Unfavorable)
(in millions) 2019 2018 Variance Percentage
Net sales $ 6,209 $ 6,289 $ (80) (1) %
Cost of sales 4,897 4,921 24 - %
Gross profit 1,312 1,368 (56) (4) %
Operating expenses 610 611 1 - %
Other income, net (19) (10) 9 90 %Restructuring/impairment charges 57 64
7 11 %
Operating income 664 703 (39) (6) %
Financing costs, net 81 86 5 6 %
Other, non-operating income 1 (4) (5) (125) %
Income before income taxes 582 621 (39) (6) %
Provision for income taxes 158 167 9 5 %
Net income 424 454 (30) (7) %
Less: Net income attributable to
non-controlling interests 11 11 - - %
Net income attributable to Ingredion $ 413 $ 443 $ (30) (7) %
Net Income attributable to Ingredion. Net income attributable to Ingredion for the year endedDecember 31, 2019 decreased to$413 million from$443 million for the year endedDecember 31, 2018 . Our results for the year endedDecember 31, 2019 included$32 million of one-time after-tax net costs, driven primarily by after-tax restructuring costs of$44 million . The restructuring charges consist of costs associated with our Cost Smart Cost of sales program in relation to the closure of the Lane Cove,Australia production facility, and costs related to the Cost Smart SG&A program, including professional services and employee-related severance primarily in theNorth America andSouth America segments. Our results for 2018 included$54 million of one-time after-tax net costs, driven primarily by after-tax restructuring costs of$51 million . The restructuring charges consist of costs associated with our Cost Smart Cost of sales program in relation to the cessation of wet-milling at theStockton, California manufacturing facility, costs related to the Cost Smart SG&A program, including employee-related severance and other costs for restructuring projects in theSouth America ,Asia-Pacific , andNorth America segments, costs related to theLatin America and North America Finance Transformation initiatives, and costs related to the cessation of our leaf extraction process inBrazil . During the year endedDecember 31, 2018 , we adjusted our provisional amounts related enactment of the TCJA and recognized an incremental$3 million of tax expense related to the TCJA. Net sales. Net sales were slightly down for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Changes in foreign currency exchange rates and volume reduction due to the cessation ofStockton wet milling were partially offset by favorable price/product mix. Cost of sales. Cost of sales for year endedDecember 31, 2019 was flat as compared to the year endedDecember 31, 2018 primarily due to higher net corn costs that were offset by lower volume. Our gross profit margin was 21 percent and 22 percent for the years endedDecember 31, 2019 , and 2018, respectively. The gross profit margin decrease primarily reflected higher costs for raw materials. Operating expenses. Operating expenses for the year endedDecember 31, 2019 , were flat as compared to the year endedDecember 31, 2018 . This was primarily driven by lower selling costs, offset by higher general and administrative costs. Operating expenses, as a percentage of gross profit, were 46 percent for the year endedDecember 31, 2019 , as compared to 45 percent for the year endedDecember 31, 2018 . 36 Table of Contents
Other income, net. Our change in other income, net for the year ended
Favorable
Year Ended December 31, (Unfavorable)
(in millions) 2019 2018 Variance
Brazil tax matters $ (22) $ - $ 22
Value-added tax recovery - (5) (5)
Other 3 (5) (8)
Other (income) expense, net $ (19) $ (10) $ 9
In January 2019 , the Company's Brazilian subsidiary received a favorable
decision from the Federal Court of Appeals in Sao Paulo, Brazil , related to
certain indirect taxes collected in prior years. As a result of the decision,
the Company expects to be entitled to indirect tax credits against its Brazilian
federal tax payments in 2020 and future years. The Company finalized its
calculation of the amount of the credits and interest due from the favorable
decision, concluding that the Company could be entitled to approximately $86
million of credits spanning a period from 2005 to 2018. The Department of
Federal Revenue of Brazil , however, issued an Internal Ruling in which it
charged that the Company is entitled to only $22 million of the calculated
indirect tax credits and interest for the period from 2005 to 2014. The Brazil
National Treasury has filed a motion for clarification with the Brazilian
Supreme Court , asking the Court, among other things, to modify the lower court's
decision to approve the Internal Ruling, which could impact the decision in
favor of the Company. Due to the uncertainty arising from the issuance of the
Internal Ruling, the Company recorded $22 million of credits in 2019 in
accordance with ASC 450, Contingencies. The $22 million of future tax credits,
which was recorded in the Consolidated Income Statement in Other income,
resulted in additional deferred income taxes of $8 million . The income taxes
will be paid as and when the tax credits are utilized. The Company received
further clarification from the court in 2020 regarding the calculation of the
Company's benefits and recorded additional credits, as described above in the
discussion of the Company's 2020 results.
Financing costs, net. Our financing costs, net for the year ended December 31,
2019 decreased $5 million from the year ended December 31, 2018 , driven by a
reduction in foreign currency losses, partly offset by higher interest expense.
Provision for income taxes. Our effective income tax rates for the years ended
The increase in the effective tax rate was primarily driven by a reduction in the excess tax benefit related to share-based payment awards. This was offset by the revaluation of the Mexican Peso versus theU.S. dollar which impacted theU.S. dollar denominated balances held inMexico compared to the devaluation of the Mexican Peso versus theU.S. dollar, in the prior year. Additionally, the effective tax rate was reduced from the prior year due to relatively lower valuation allowances on Argentine net operating losses. Net income attributable to non-controlling interests. Net income attributable to non-controlling interests for the year endedDecember 31, 2019 , was flat when compared to the year endedDecember 31, 2018 .
2019 Compared to 2018 -
Favorable Favorable
Year Ended December 31, (Unfavorable) (Unfavorable)
(in millions) 2019 2018 Variance PercentageNet sales to unaffiliated customers$ 3,834 $ 3,857 $
(23) (1) %
Operating income 522 545 (23) (4) %
Net sales. Our decrease in net sales of 1 percent for the year ended December
31, 2019 , as compared to the year ended December 31, 2018 , was driven by a 2
percent decrease in volume, partially offset by a 1 percent improvement in
price/product mix.
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Operating income. Our operating income decreased $23 million for the year ended
December 31, 2019 , as compared to the year ended December 31, 2018 , due to
higher net cost of corn and production costs, which were partially offset by
favorable pricing.
2019 Compared to 2018 -
Favorable Favorable
Year Ended December 31, (Unfavorable) (Unfavorable)
(in millions) 2019 2018 Variance PercentageNet sales to unaffiliated customers$ 960 $ 988 $
(28) (3) %
Operating income 96 99 (3) (3) %
Net sales. Our decrease in net sales of 3 percent for the year ended
Operating income. Our decrease in operating income of$3 million for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 , was primarily driven by foreign exchange impacts and higher net corn costs, which were partially offset by favorable pricing actions.
2019 Compared to 2018 -
Favorable Favorable
Year Ended December 31, (Unfavorable) (Unfavorable)
(in millions) 2019 2018 Variance PercentageNet sales to unaffiliated customers$ 823 $ 837 $
(14) (2) %
Operating income 87 104 (17) (16) %
Net sales. Our decrease in net sales of 2 percent for the year ended
Operating income. Our decrease in operating income of$17 million for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 , was driven by higher regional input costs, increased net corn cost inAustralia , and foreign exchange impacts. 2019 Compared to 2018 - EMEA Favorable Favorable Year Ended December 31, (Unfavorable) (Unfavorable) (in millions) 2019 2018 Variance Percentage
Net sales to unaffiliated customers$ 592 $ 607 $
(15) (2) %
Operating income 99 116 (17) (15) %
Net sales. Our decrease in net sales of 2 percent for the year ended December
31, 2019 , as compared to the year ended December 31, 2018 , was driven by
unfavorable foreign exchange of 11 percent, partially offset by volume growth of
2 percent and improved price/product mix of 7 percent.
Operating income. Our decrease in operating income of $17 million for the year
ended December 31, 2019 , as compared to the year ended December 31, 2018 , was
driven by higher raw material costs and unfavorable foreign exchange impacts,
driven primarily by the Pakistan rupee, which were partially offset by improved
price mix.
Liquidity and Capital Resources
AtDecember 31, 2020 , our total assets were approximately$6.9 billion , as compared to approximately$6.0 billion atDecember 31, 2019 . The increase was primarily driven by cash on hand after the issuance of debt, as well as continued capital investment in growth platforms. Total equity increased to approximately$3.0 billion atDecember 31, 2020 , from approximately$2.7 billion atDecember 31, 2019 . This increase primarily reflects our current year earnings. 38 Table of Contents During the year endedDecember 31, 2020 , we sold two tranches of senior notes (the "Notes"), consisting of our 2.900% senior notes due 2030 in the principal amount of$600 million and our 3.900% senior notes due 2050 in the principal amount of$400 million . We recorded the aggregate discount of approximately$7 million at which the Notes were issued and capitalized debt issuance costs of approximately$9 million associated with the Notes. We applied the net proceeds from the sale of the Notes to pay in full the outstanding balance of$394 million under our revolving credit facility described below ("Revolving Credit Facility") and set aside funds to repay our 4.625% senior notes dueNovember 1, 2020 (the "November 2020 Notes"). OnJune 8, 2020 , we issued a notice for the redemption in full of all$400 million principal amount of theNovember 2020 Notes. TheNovember 2020 Notes were redeemed onJuly 9, 2020 for a total redemption price of$409 million , including$4 million of accrued interest and a$5 million "make-whole" premium as set forth in the indenture governing theNovember 2020 Notes. During the year endedDecember 31, 2020 , we used proceeds from the Revolving Credit Facility to repay$200 million of our 5.62% senior notes dueMarch 25, 2020 . OnApril 12, 2019 , we amended and restated the Term Loan Credit Agreement for a$165 million senior unsecured term loan credit facility that was set to mature onApril 25, 2019 ("Term Loan") to establish a 24-month senior unsecured term loan credit facility in an amount up to$500 million that matures onApril 12, 2021 . We used the$500 million of borrowings under the new facility to pay down the amounts outstanding under the Revolving Credit Facility and to pay off the Term Loan balance. The balance of the amended and restated term loan credit agreement for the new facility ("Amended Term Loan Credit Agreement") was$380 million as ofDecember 31, 2020 and matures onApril 12, 2021 . All borrowings under the Amended Term Loan Credit Agreement bear interest at a variable annual rate based on the specified London Interbank Offered Rate ("LIBOR") or a base rate, at our election, subject to the terms and conditions thereof, plus, in each case, an applicable margin. We are required to pay a fee on the unused availability under the Amended Term Loan Credit Agreement. The Amended Term Loan Credit Agreement contains customary representations, warranties, covenants and events of default, including covenants restricting the incurrence of liens, the incurrence of indebtedness by our subsidiaries and certain fundamental changes involving the Company and our subsidiaries, subject to certain exceptions in each case. We must also maintain a specified consolidated leverage ratio and consolidated interest coverage ratio. As ofDecember 31, 2020 , we were in compliance with these financial covenants. The occurrence of an event of default under the Amended Term Loan Credit Agreement could result in all loans and other obligations being declared due and payable and the term loan credit facility being terminated. OnOctober 11, 2016 , we entered into a five-year, senior, unsecured$1 billion revolving credit agreement (the "Revolving Credit Agreement") for the Revolving Credit Facility, which replaced a$1 billion senior, unsecured revolving credit facility. All committed pro rata borrowings under the Revolving Credit Facility will bear interest at a variable annual rate based on LIBOR or a base rate, at our election, subject to the terms and conditions thereof, plus, in each case, an applicable margin based on our leverage ratio (as reported in the financial statements delivered pursuant to the Revolving Credit Agreement) or our credit rating. Subject to specified conditions, we may designate one or more of our subsidiaries as additional borrowers under the Revolving Credit Agreement provided that we guarantee 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 covenants restricting liens, subsidiary debt and mergers, subject to certain exceptions in each case. We must also comply with a leverage ratio covenant and an interest coverage ratio covenant. As ofDecember 31, 2020 , we were in compliance with these financial covenants. 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.
As of
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Agreement, the Company has approximately
As of
As of
(in millions) December 31, 2020
2.900% senior notes due June 1, 2030 $ 594
3.200% senior notes due October 1, 2026 497
3.900% senior notes due June 1, 2050 390
6.625% senior notes due April 15, 2037 253
Other long-term borrowings 14
Total long-term debt 1,748
Term loan credit agreement due April 12, 2021 380
Other short-term borrowings 58
Total short-term borrowings 438
Total debt $ 2,186
We, as the parent company, guarantee certain obligations of our consolidated
subsidiaries. As of
Our principal source of our liquidity is our internally generated cash flow, which we supplement as necessary with our ability to borrow under our credit facilities and to raise funds in the capital markets.
The weighted average interest rate on our total indebtedness was approximately 3.4 percent and 4.3 percent for 2020 and 2019, respectively.
Net Cash Flows A summary of operating cash flows for the years endedDecember 31, 2020 , 2019, and 2018 is shown below: Year Ended December 31, (in millions) 2020 2019 2018 Net income$ 354 $ 424 $ 454 Depreciation and amortization 213 220 247 Mechanical stores expense 54 57 57 Charge for fair value mark-up of acquired inventory 6 - - Deferred income taxes (7) 3 (23) Changes in working capital 150 (54) (118) Other 59 30 86 Cash provided by operations$ 829 $ 680 $ 703
Cash provided by operations was$829 million in 2020 as compared with$680 million for the year endedDecember 31, 2019 . The increase for the year endedDecember 31, 2020 was primarily due to changes in working capital versus the prior year, partly offset by lower net income. Cash provided by operations for the year endedDecember 31, 2019 decreased compared to the year endedDecember 31, 2018 primarily due to lower net income in the year endedDecember 31, 2019 . To manage price risk related to corn purchases, we use derivative instruments, consisting of corn futures and options contracts, to lock in our corn costs associated with firm-priced customer sales contracts. As the market price of these commodities fluctuates, 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
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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
commodities.
Listed below are our primary investing and financing activities for the years
ended
Year Ended December 31,
(in millions) 2020 2019 2018
Capital expenditures and mechanical stores
purchases $ (340) $ (328) $(350)
Payments for acquisitions, net of cash acquired (236) (42)
-
Payments on debt (1,224) (1,465)
(738)
Proceeds from borrowings 1,550 1,209
987
Dividends paid (including to non-controlling interests) (178) (174) (182) Repurchases of common stock - 63 (657) OnDecember 11, 2020 , our Board of Directors declared a quarterly cash dividend of$0.64 per share of common stock. This dividend was paid onJanuary 28, 2021 , to stockholders of record at the close of business onJanuary 4, 2021 . We paid$340 million of capital expenditures and mechanical stores purchases to update, expand and improve our facilities in 2020. InJuly 2020 , we acquired a controlling interest in PureCircle for$208 million , net of cash acquired of$14 million . We have not provided foreign withholding taxes, state income taxes, and federal and state taxes on foreign currency gains/losses on accumulated undistributed earnings of certain foreign subsidiaries because these earnings are considered to be permanently reinvested. It is not practicable to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings. We do not anticipate the need to repatriate funds to theU.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. Approximately$427 million of our total cash and cash equivalents and short-term investments of$665 million atDecember 31, 2020 , were held by our operations outside of theU.S. Hedging and Financial Risk Hedging: We are exposed to market risk stemming from changes in commodity prices (primarily corn and natural gas), foreign-currency exchange rates, and interest rates. In the normal course of business, we actively manage our exposure to these market risks by entering into various hedging transactions, authorized under established policies that place controls on these activities. These transactions utilize exchange-traded derivatives or over-the-counter derivatives with investment grade counterparties. Our hedging transactions may include, but are not limited to, a variety of derivative financial instruments such as commodity-related futures, options and swap contracts, forward currency-related contracts and options, interest rate swap agreements, andTreasury lock agreements ("T-Locks"). See Note 6 of the Notes to the Consolidated Financial Statements for additional information. Commodity Price Risk: Our principal use of derivative financial instruments is to manage commodity price risk inNorth America relating to anticipated purchases of corn and natural gas to be used in our manufacturing process. We periodically enter into futures, options and swap contracts for a portion of our anticipated corn and natural gas usage, generally over the following 12 to 24 months, in order to hedge price risk associated with fluctuations in market prices. Unrealized gains and losses associated with marking our commodities-based cash flow hedge derivative instruments to market are recorded as a component of other comprehensive income ("OCI"). As ofDecember 31, 2020 , our Accumulated other comprehensive loss account ("AOCI") included$47 million of net gains (net of income tax expense of$16 million ) related to these derivative instruments. It is anticipated that$44 million of net gains (net of income tax expense of$15 million ) will be reclassified into earnings during the next 12 months. We expect the net gains to be offset by changes in the underlying commodities costs. 41 Table of Contents Foreign Currency Exchange Risk: Due to our global operations, including operations in many emerging markets, we are exposed to fluctuations in foreign-currency exchange rates. As a result, we have exposure to translational foreign-exchange risk when our foreign operations' results are translated toU.S. dollars and to transactional foreign-exchange risk when transactions not denominated in the functional currency of the operating unit are revalued intoU.S. dollars. We primarily use derivative financial instruments such as foreign-currency forward contracts, swaps and options to manage our foreign currency transactional exchange risk. We enter into foreign-currency derivative instruments that are designated as both cash flow hedging instruments as well as instruments not designated as hedging instruments as defined by ASC 815, Derivatives and Hedging. As ofDecember 31, 2020 , we had foreign currency forward sales contracts with an aggregate notional amount of$410 million and foreign currency forward purchase contracts with an aggregate notional amount of$224 million not designated as hedging instruments. As ofDecember 31, 2020 , we had foreign-currency forward sales contracts with an aggregate notional amount of$401 million and foreign-currency forward purchase contracts with an aggregate notional amount of$542 million designated as cash flow hedging instruments. The amount included in AOCI relating to these hedges atDecember 31, 2020 , was$1 million of net losses (net of an insignificant amount of income tax benefit). The net losses reclassified into earnings during the next 12 months are not anticipated to be significant. We have significant operations inArgentina . In the second quarter of 2018, the Argentine peso rapidly devalued relative to theU.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation in that country exceeded 100 percent as ofJune 30, 2018 . As a result, we elected to adopt hyperinflation accounting as ofJuly 1, 2018 for our affiliate,Ingredion Argentina S.A. Under hyperinflation accounting, our affiliate's functional currency is theU.S. dollar, and its income statement and balance sheet are measured inU.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on Argentine-peso-denominated monetary assets and liabilities is reflected in earnings in financing costs. Interest Rate Risk: We occasionally use interest rate swaps and T-Locks to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, or to achieve a desired proportion of fixed versus floating rate debt, based on current and projected market conditions. We did not have any T-Locks outstanding as ofDecember 31, 2020 . As ofDecember 31, 2020 , our AOCI account included$4 million of net losses (net of$1 million tax benefit) related to settled T-Locks. These deferred losses are being amortized to financing costs over the term of the senior notes with which they are associated. The net losses reclassified into earnings during the next 12 months are not anticipated to be significant. As ofDecember 31, 2020 , the Company did not have any outstanding interest rate swaps. As ofDecember 31, 2019 , the Company had an outstanding interest rate swap agreement that converted the interest rates on$200 million of its$400 million 4.625% senior notes dueNovember 1, 2020 , to variable rates. The Company redeemed these notes inJuly 2020 and settled the outstanding interest rate
swap.
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Contractual Obligations
The table below summarizes our significant contractual obligations as of
December 31, 2020 .
Payments due by period
Less More
Note than 1 2 - 3 4 - 5 than 5
Contractual Obligations (in millions) reference Total year years years years
Long-term debt (inclusive of Short-term
borrowings) 7 $ 2,186 $ 438 $ 11 $ 1 $ 1,736
Interest on long-term debt 7 1,001 72 131 131 667
Operating lease obligations 8 202 51 76 38 37
Pension and other postretirement
obligations 10 141 4 13 14 110
Purchase obligations (a) 730 311 234 72 113
Total (b) $ 4,260 $ 876 $ 465 $ 256 $ 2,663 The purchase obligations relate principally to raw material and power supply (a) sourcing agreements, including take or pay contracts, which help to provide
us with adequate power and raw material supply at certain of our facilities.
The above table does not reflect unrecognized income tax benefits of
Consolidated Financial Statements for additional information with respect to
unrecognized income tax benefits.
Off-Balance Sheet Arrangements
As ofDecember 31, 2020 , we were not subject to any obligations pursuant to any off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, or liquidity. 43
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Key Financial Performance Metrics
We use certain key financial performance metrics to monitor our progress towards achieving our long-term strategic business objectives. These metrics relate to our ability to drive profitability, create value for stockholders, and monitor our financial leverage. We assess whether we are achieving our profitability and value creation objectives by measuring our Adjusted Return onInvested Capital ("Adjusted ROIC"). We monitor our financial leverage by regularly reviewing our ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization ("Net Debt to Adjusted EBITDA") and our Net Debt to Capitalization percentage to assure that we are properly financed. We believe these metrics provide valuable managerial information to help us run our business and are useful to investors. The metrics Adjusted ROIC and Net Debt to Adjusted EBITDA include certain information (Adjusted Operating Income, net of tax and Adjusted EBITDA, respectively) that is not calculated in accordance withU.S. generally accepted accounting principles ("GAAP"). We also have presented below the most comparable metrics calculated using components determined in accordance with GAAP. Management uses these non-GAAP financial measures internally for strategic decision-making, forecasting future results, and evaluating current performance. Management believes that the non-GAAP financial measures provide a more consistent comparison of our operating results and trends for the periods presented. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP and reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. In accordance with our long-term objectives, we set certain objectives relating to these key financial performance metrics that we strive to meet. However, no assurance can be given that we will continue to meet our financial performance metric targets. See Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The objectives reflect our current aspirations in light of our present plans and existing circumstances. We may change these objectives from time to time in the future to address new opportunities or changing circumstances as appropriate to meet our long-term needs and those of our stockholders.
A reconciliation of non-GAAP historical financial measures to the most comparable GAAP measure is provided in the tables below.
Adjusted ROIC: Adjusted ROIC is a financial performance ratio not defined under GAAP, and it should be considered in addition to, and not as a substitute for, GAAP financial measures. The Company defines Adjusted ROIC as Adjusted operating income, net of tax, divided by Average end-of-year balances for current year and prior year Total net debt and equity. Similarly named measures may not be defined and calculated by other companies in the same manner. The Company believes Adjusted ROIC is meaningful to investors as it focuses on profitability and value-creating potential, taking into account the amount of capital invested. The most comparable measure calculated using components determined in accordance with GAAP is Return onInvested Capital , which the Company defines as Net income, divided by Average end-of-year balances for current year and prior year Total net debt and equity. The calculations for Return onInvested Capital and Adjusted ROIC for the periods indicated are
provided in the table below.
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Year ended December 31 ,Return onInvested Capital (dollars in millions) 2020
2019
Net income (a)$ 354 $
424
Adjusted for: Provision for income taxes (iii) 152
158
Other, non-operating (income) expense, net (5)
1
Financing cost, net 81
81
Restructuring/impairment charges (i) 93
57
Acquisition/integration costs 11
3
Charge for fair value markup of acquired inventory 6
-
North America storm damage 3 -
Other matters (ii) (36) (19)Income taxes (at effective rates of 26.9% and 26.8%, (177)
(189)
respectively) (iii) Adjusted operating income, net of tax (b) 482
516
Short-term debt 438 82
Long-term debt 1,748 1,766Less: Cash and cash equivalents (665)
(264)
Short-term investments - (4)
Total net debt 1,521 1,580Share-based payments subject to redemption 30
31
Total redeemable non-controlling interests 70
-
Total equity 2,972 2,741
Total net debt and equity $ 4,593 $ 4,352 Average current and prior year Total net debt and
4,282
equity (c)
Return onInvested Capital (a ÷ c) 7.9%
9.9%
Adjusted Return onInvested Capital (b ÷ c) 10.8%
12.1%
For the year ended
restructuring/impairment charges. We recorded
restructuring charges, consisting of
other costs, including professional services, associated with our Cost Smart
SG&A program and
addition, we recorded impairment charges of
million impairment of our intangible assets related to acquired tradenames
(i) and a
decrease in fair value on our investment based on the agreed upon purchase
price of the remaining 80% interest in
ended
restructuring/impairment charges. For the year ended
Company recorded
million of net restructuring related expenses as part of the Cost Smart Cost
of sales program and
including professional services, associated with our Cost Smart SG&A program.
For the year ended
the
collected in prior years. To account for the judgment, we recorded a $22
million pre-tax benefit for the favorable judgment, in accordance with ASC
450, Contingencies for the year ended December 31, 2019 . This benefit wasoffset by other adjusted charges during the period. In the current year, we
received another favorable court judgment that further clarifies the
calculation of our benefit, resulting in a larger indirect tax claim against
(ii) the government. As a result, we recorded an additional
benefit for the year ended
credits against Brazilian federal tax payments in 2021 and future years. The
total benefit recorded represents our current estimate of the credits and
interest due from the favorable decision in accordance with ASC 450,
Contingencies. In addition, we received a second favorable ruling in
reversing the taxes previously paid related to a government subsidy. We
recorded a pre-tax benefit of $1 million and tax provision benefit of $3
million related to this second ruling for the year ended
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The effective income tax rate for the years ended
2019 was 26.9 percent and 26.8 percent, respectively. For purposes of this
calculation we exclude the provision for income taxes from the calculation (iii) and subsequently add back income taxes for adjusted operating income using
the adjusted effective income tax rate. The adjusted effective income tax
rate is calculated by removing the tax impact for the identified adjusted
items below.
Year Ended December 31, 2020 Year Ended December 31, 2019
Effective Effective
Income before Provision for Income Income before Provision for Income
(dollars in millions) Income Taxes Income Taxes Tax Rate Income Taxes Income Taxes Tax Rate
As reported $ 506 $ 152 30.0% $ 582 $ 158 27.1%
Add back (deduct):
Impairment/restructuring
charges 93 18 57 13Acquisition/integration costs 11 2 3 1 Charge for fair value mark-up of acquired inventory 6 - - - Charge for early extinguishment of debt 5 1 - - North America storm damage 3 - - - Other matters (36) (9) (19) (8) Tax item - Mexico - (3) - 3 Other tax matters - (3) - - Adjusted non-GAAP $ 588 $ 158 26.9% $ 623 $ 167 26.8%
Our long-term objective is to maintain an Adjusted ROIC in excess of 10 percent.
For the year endedDecember 31, 2020 , we achieved an Adjusted ROIC of 10.8 percent as compared to 12.1 percent for the year endedDecember 31, 2019 . The decrease in Adjusted ROIC percentage is primarily a result of an increase in equity and a lower adjusted operating income, net of tax for the year endedDecember 31, 2020 . Net Debt to Adjusted EBITDA: Net Debt to Adjusted EBITDA is a financial performance ratio that is not defined under GAAP, and it should be considered in addition to, and not as a substitute for, GAAP financial measures. The Company defines this measure as Short-term and Long-term debt less Cash and cash equivalents and Short-term investments, divided by Adjusted EBITDA. Similarly named measures may not be defined and calculated by other companies in the same manner. The Company believes Total net debt to Adjusted EBITDA is meaningful to investors as it focuses on the Company's leverage on a comparable Adjusted EBITDA basis, and helps investors better understand the time required to pay back the Company's outstanding debt. The most comparable ratio calculated using components determined in accordance with GAAP is Total net debt to Income before income taxes, calculated as Short-term and Long-term debt less Cash and cash equivalents and Short-term investments, divided by Income before income taxes. The 46 Table of Contents
calculations for the ratio of Total net debt to Income before income taxes and
for the ratio of Total net debt to Adjusted EBITDA as of the dates indicated are
provided in the table below.
As of December 31,
Net Debt to Adjusted EBITDA ratio 2020 2019
Short-term debt $ 438 $ 82
Long-term debt 1,748 1,766
Less: Cash and cash equivalents (665) (264)
Short-term investments - (4)
Total net debt (a) 1,521 1,580
Income before income taxes (b) 506 582
Adjusted for:
Depreciation and amortization 213 220
Financing cost, net 81 81
Restructuring/impairment (i) 85 44
Acquisition/integration costs 11 3
Charge for fair value markup of acquired inventory 6 -
Charge for early extinguishment of debt 5 -
North America storm damage 3 -
Other matters (ii) (36) (19)
Adjusted EBITDA (c) $ 874 $ 911 Net Debt to Income before income tax ratio (a ÷ b) 3.0 2.7 Net Debt to Adjusted EBITDA ratio (a ÷ c)
1.7 1.7
For the year ended
reduced by
related to the
production at the
2019, restructuring/impairment charges are reduced by
production facility closure. The accelerated depreciation is included in
Depreciation and amortization above, and to include in
restructuring/impairment charge would include the charge twice. See Note 5
of the Notes to the Consolidated Financial Statements for reconciliation to
the
ended December 31, 2020 and 2019, respectively.
In 2019 we received a favorable judgment from the
in
account for the judgment, we recorded a
favorable judgment, in accordance with ASC 450, Contingencies during the
year ended
favorable court judgment that further clarifies the calculation of our
benefit, resulting in a larger indirect tax claim against the government. As
(ii) a result, we recorded an additional
year ended
our Brazilian federal tax payments in 2021 and future years. The total
benefit recorded represents our current estimate of the credits and interest
due from the favorable decision in accordance with ASC 450, Contingencies.
In addition, we received a second favorable ruling in
taxes previously paid related to a government subsidy. We recorded a pre-tax
benefit of
this second ruling for the year ended December 31, 2020 .
Our long-term objective is to maintain a ratio of Net Debt to Adjusted EBITDA of
less than 2.25. As of December 31, 2020 , and December 31, 2019 , the ratio was
1.7.
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Net Debt to Capitalization percentage: The Company defines Net Debt to
Capitalization percentage as Total net debt, defined as Short-term and Long-term
debt less Cash and cash equivalents and Short-term investments, divided by Total
net debt and capital, defined as the sum of Deferred income tax liabilities,
Share-based payments subject to redemption, Total equity, and Total net debt.
The calculations for Net Debt to Capitalization percentage as of the dates
indicated are provided in the table below.
As of December 31 ,Net Debt to Capitalization percentage (dollars in millions) 2020
2019 Short-term debt$ 438 $ 82 Long-term debt 1,748 1,766
Less: Cash and cash equivalents (665)
(264)
Short-term investments - (4)
Total net debt (a) 1,521 1,580Deferred income tax liabilities 217
195
Share-based payments subject to redemption 30
31
Redeemable non-controlling interests 70
-
Total equity 2,972 2,741
Total capital 3,289 2,967Total net debt and capital (b)$ 4,810
Net Debt to Capitalization percentage (a ÷ b) 31.6%
34.7%
Our long-term objective is to maintain a Net Debt to Capitalization percentage
in the range of 30 to 35 percent. As of
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements have been prepared in accordance with
GAAP. The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from these
estimates under different assumptions and conditions.
We have identified below the most critical accounting policies upon which the
financial statements are based and that involve our most complex and subjective
decisions and assessments. Our senior management has discussed the development,
selection and disclosure of these policies with members of the Audit Committee
of our Board of Directors. These accounting policies are provided in the Notes
to the Consolidated Financial Statements. The discussion that follows should be
read in conjunction with the Consolidated Financial Statements and related notes
included elsewhere in this Annual Report on Form 10-K.
Business Combinations: Our acquisitions of PureCircle and Verdient in 2020 were
accounted for in accordance with Accounting Standards Codification ("ASC") Topic
805, Business Combinations. In purchase accounting, identifiable assets acquired
and liabilities assumed, are recognized at their estimated fair values at the
acquisition date, and any remaining purchase price is recorded as goodwill. In
determining the fair values of assets acquired and liabilities assumed, we make
significant estimates and assumptions, particularly with respect to long-lived
tangible and intangible assets. Critical estimates used in valuing tangible and
intangible assets include, but are not limited to, future expected cash flows,
discount rates, market prices and asset lives. Although our estimates of fair
value are based upon assumptions believed to be reasonable, actual results may
differ. See Note 3 of the Notes to the Consolidated Financial Statements for
more information related to our acquisitions.
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Property, Plant and Equipment and Definite-Lived Intangible Assets: We have
substantial investments in property, plant and equipment ("PP&E") and
definite-lived intangible assets. For PP&E, we recognize the cost of depreciable
assets in operations over the estimated useful life of the assets and evaluate
the recoverability of these assets whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. For
definite-lived intangible assets, we recognize the cost of these amortizable
assets in operations over their estimated useful life and evaluate the
recoverability of the assets whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. The
carrying values of PP&E and definite-lived intangible assets at
December 31, 2020 , were $2.5 billion and $301 million , respectively.
In assessing the recoverability of the carrying value of PP&E and definite-lived
intangible assets, we may have to make projections regarding future cash flows.
In developing these projections, we make a variety of important assumptions and
estimates that have a significant impact on our assessments of whether the
carrying values of PP&E and definite-lived intangible assets should be adjusted
to reflect impairment. Among these are assumptions and estimates about the
future growth and profitability of the related asset group, anticipated future
economic, regulatory and political conditions in the asset group's market and
estimates of terminal or disposal values. No impairment charges for PP&E or
definite-lived intangible assets were recorded in 2020.
Through our continual assessment to optimize our operations, we address whether
there is a need for additional consolidation of manufacturing facilities or to
redeploy assets to areas where we can expect to achieve a higher return on our
investment. This review may result in the closing or selling of certain of our
manufacturing facilities. The closing or selling of any of the facilities could
have a significant negative impact on the results of operations in the year in
which the closing or selling of a facility occurs.
Even though it was determined that there was no long-lived asset impairment as
of December 31, 2020 , the future occurrence of a potential indicator of
impairment, such as a significant adverse change in the business climate that
would require a change in our assumptions or strategic decisions made in
response to economic or competitive conditions, could require us to perform
tests of recoverability in the future.
Indefinite-Lived Intangible Assets and Goodwill : We have certain
indefinite-lived intangible assets in the form of tradenames and trademarks. Our
methodology for allocating the purchase price of acquisitions is based on
established valuation techniques that reflect the consideration of a number of
factors, including valuations performed by third-party appraisers when
appropriate. Goodwill is measured as the excess of the cost of an acquired
business over the fair value assigned to identifiable assets acquired and
liabilities assumed. We have identified several reporting units for which cash
flows are determinable and to which goodwill may be allocated. Goodwill is
either assigned to a specific reporting unit or allocated between reporting
units based on the relative excess fair value of each reporting unit. The
carrying value of indefinite-lived intangible assets and goodwill at
December 31, 2020 , was $143 million and $902 million , respectively, compared to
$178 million and $801 million , respectively, at December 31, 2019 .
We assess indefinite-lived intangible assets and goodwill for impairment
annually (or more frequently if impairment indicators arise). We perform this
annual impairment assessment as of July 1 each year. In testing indefinite-lived
intangible assets for impairment, we first assess qualitative factors to
determine whether it is more-likely-than-not that the fair value of an
indefinite-lived intangible asset is impaired. After assessing the qualitative
factors, if we determine that it is more-likely-than-not that the fair value of
an indefinite-lived intangible asset is greater than its carrying amount, then
we would not be required to compute the fair value of the indefinite-lived
intangible asset. In the event the qualitative assessment leads us to conclude
otherwise, then we would be required to determine the fair value of the
indefinite-lived intangible assets and perform a quantitative impairment test in
accordance with ASC subtopic 350-30. In performing the qualitative analysis, we
consider various factors including net sales derived from these intangibles and
certain market and industry conditions. Based on the results of our assessment,
we concluded that as of July 1, 2020 , there were no impairments in our
indefinite-lived intangible assets.
Subsequent to the Company's annual assessment, the Company identified an
impairment indicator and recorded an impairment of $35 million for its
indefinite-lived intangible asset associated with the TIC Gums tradename. The
impairment event was the result of management's decision to rebrand the TIC Gums
products using the broader Ingredion
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name and the Ingredient Solutions sub-branding beginning in 2021. There is no change to the projected revenue or operating income from the legacy brands.
In testing goodwill for impairment, we first assess qualitative factors in determining whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. After assessing the qualitative factors, if we determine that it is more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount, then we do not perform an impairment test. If we conclude otherwise, then we perform the impairment test as described in ASC Topic 350. Under this impairment test, the fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit exceeds the carrying value of its net assets, goodwill is not considered impaired and no further testing is required. If the carrying value of the net assets exceeds the fair value of the reporting unit, then an impairment exists for the difference between the fair value and carrying value of the reporting unit. This difference is not to exceed the goodwill recorded at the reporting unit. In performing our impairment tests for goodwill, management makes certain estimates and judgments. These estimates and judgments include the identification of reporting units and the determination of fair values of reporting units, which management estimates using both discounted cash flow analyses and an analysis of market multiples. Significant assumptions used in the determination of fair value for reporting units include estimates for discount and long-term net sales growth rates, in addition to operating and capital expenditure requirements. We consider changes in discount rates for the reporting units based on current market interest rates and specific risk factors within each geographic region. We also evaluate qualitative factors, such as legal, regulatory, or competitive forces, in estimating the impact to the fair value of the reporting units noting no significant changes that would result in any reporting unit failing the impairment test. Changes in assumptions concerning projected results or other underlying assumptions could have a significant impact on the fair value of the reporting units in the future. Based on the results of the annual assessment, we concluded that as ofJuly 1, 2020 , there were no impairments in our reporting units. Income Taxes: We recognize the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities and provide a valuation allowance when deferred tax assets are not more likely than not to be realized. We have considered forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, we would increase the valuation allowance and make a corresponding charge to earnings in the period in which we make such a determination. Likewise, if we later determine that we are more likely than not to realize the deferred tax assets, we would reverse the applicable portion of the previously provided valuation allowance. We had a valuation allowance of$30 million and$29 million atDecember 31, 2020 and 2019, respectively. We are regularly audited by various taxing authorities, and sometimes these audits result in proposed assessments where the ultimate resolution may result in our owing additional taxes. We establish reserves when, despite our belief that our tax return positions are appropriate and supportable under local tax law, we believe there is uncertainty with respect to certain positions and we may not succeed in realizing the tax benefits. We evaluate these unrecognized tax benefits and related reserves each quarter and adjust the reserves and the related interest and penalties in light of changing facts and circumstances regarding the probability of realizing tax benefits, such as the settlement of a tax audit or the expiration of a statute of limitations. We believe the estimates and assumptions used to support our evaluation of tax benefit realization are reasonable. However, final determinations of prior-year tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially different than estimates reflected in assets and liabilities and historical income tax provisions. The outcome of these final determinations could have a material effect on our income tax provision, net income or cash flows in the period in which that determination is made. We believe our tax positions comply with applicable tax law and that we have adequately provided for any known tax contingencies. Our liability for unrecognized tax benefits, excluding interest and penalties atDecember 31, 2020 , and 2019 was$46 million and$22 million , respectively. The increase in the unrecognized tax benefits from 2020 to 2019 is primarily attributable to the acquisition of a controlling interest in PureCircle. The Company recorded a$31 million liability for foreign withholding and state income taxes on certain unremitted earnings from foreign subsidiaries. No foreign withholding taxes, state income taxes and federal and state taxes on foreign currency gains and losses have been provided on approximately$2.2 billion of undistributed earnings of 50
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foreign earnings that are considered indefinitely reinvested. If future events, including changes in tax law, material changes in estimates of cash, working capital, and long-term investment requirements, necessitate that these earnings be distributed, an additional provision for income taxes may apply, which could materially affect our future effective tax rate and cash flows. Retirement Benefits: We and our subsidiaries sponsor noncontributory defined benefit pension plans (qualified and non-qualified) covering a substantial portion of employees in theU.S. andCanada , and certain employees in other foreign countries. We also provide healthcare and life insurance benefits for retired employees in theU.S. ,Canada , andBrazil . In order to measure the expense and obligations associated with these benefits, our management must make a variety of estimates and assumptions, including discount rates, expected long-term rates of return, rate of compensation increases, employee turnover rates, retirement rates, mortality rates, and other factors. We review our actuarial assumptions on an annual basis as ofDecember 31 (or more frequently if a significant event requiring remeasurement occurs) and modify our assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the balance sheet, but are generally amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income. We believe the assumptions utilized in recording our obligations under our plans, which are based on our experience, market conditions, and input from our actuaries, are reasonable. We use third-party specialists to assist management in evaluating our assumptions and estimates, as well as to appropriately measure the costs and obligations associated with our retirement benefit plans. Had we used different estimates and assumptions with respect to these plans, our retirement benefit obligations and related expense could vary from the actual amounts recorded, and such differences could be material. Additionally, adverse changes in investment returns earned on pension assets and discount rates used to calculate pension and postretirement benefit related liabilities or changes in required funding levels may have an unfavorable impact on future expense and cash flow. Net periodic pension and postretirement benefit cost for all of our plans was$4 million in 2020 and$10 million in 2019. We determine our assumption for the discount rate used to measure year-end pension and postretirement obligations based on high-quality fixed-income investments that match the duration of the expected benefit payments, which has been benchmarked using a long-term, high-quality AA corporate bond index. We use a full yield curve approach in the estimation of the service and interest cost components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. The weighted average discount rate used to determine our obligations underU.S. pension plans as ofDecember 31, 2020 and 2019 was 2.58 percent and 3.34 percent, respectively. The weighted average discount rate used to determine our obligations under non-U.S. pension plans as ofDecember 31, 2020 and 2019 was 2.84 percent and 3.55 percent, respectively. The weighted average discount rate used to determine our obligations under our postretirement plans as ofDecember 31, 2020 and 2019 was 3.69 percent and 4.18 percent, respectively.
A one percentage point decrease in the discount rates at
U.S. Pension Plans Accumulated benefit obligation$ 47 Projected benefit obligation 48 Non-U.S. Pension Plans Accumulated benefit obligation$ 34 Projected benefit obligation 38 Postretirement Plans Accumulated benefit obligation$ 10 Our investment approach and related asset allocation for theU.S. andCanada plans is a liability-driven investment approach by which a higher proportion of investments will be in interest-rate sensitive investments (fixed income) under an active-management approach. The approach seeks to protect the current funded status of the plans from market volatility with a greater asset allocation to interest-rate sensitive assets. The greater allocation to interest-rate sensitive assets is expected to reduce volatility in plan funded status by more closely matching movements in asset values to changes in liabilities. 51 Table of Contents
Our current investment policy for our pension plans is to balance risk and return through diversified portfolios of actively-managed equity index instruments, fixed income index securities, and short-term investments. Maturities for fixed income securities are managed such that sufficient liquidity exists to meet near-term benefit payment obligations. The asset allocation is reviewed regularly and portfolio investments are rebalanced to the targeted allocation when considered appropriate or to raise sufficient liquidity when necessary to meet near-term benefit payment obligations. For 2020 net periodic pension cost, we assumed an expected long-term rate of return on assets, which is based on the fair value of plan assets, of 5.30 percent forU.S. plans and approximately 3.81 percent for Canadian plans. In developing the expected long-term rate of return assumption on plan assets, which consist mainly ofU.S. and Canadian debt and equity securities, management evaluated historical rates of return achieved on plan assets and the asset allocation of the plans, input from our independent actuaries and investment consultants, and historical trends in long-term inflation rates. Projected return estimates made by such consultants are based upon broad equity and bond indices. We also maintain several funded pension plans in other international locations. The expected returns on plan assets for these plans are determined based on each plan's investment approach and asset allocations. A hypothetical 25 basis point decrease in the expected long-term rate of return assumption would increase 2021 net periodic pension cost for theU.S. andCanada plans by approximately$1 million each. Healthcare cost trend rates are used in valuing our postretirement benefit obligations and are established based upon actual health care cost trends and consultation with actuaries and benefit providers. AtDecember 31, 2020 , the health care cost trend rate assumptions for the next year for theU.S. ,Canada , andBrazil plans were 5.90 percent, 5.83 percent and 7.07 percent, respectively.
See Note 10 of the Notes to the Consolidated Financial Statements for more information related to our benefit plans.
New Accounting Standards
See Note 2 of the Notes to the Consolidated Financial Statements for a summary
of recently adopted accounting standards that are applicable to our Consolidated
Financial Statements.
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Forward-Looking Statements
This Form 10-K contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends these forward-looking statements to be covered by the safe harbor provisions for such statements.
Forward-looking statements include, among others, any statements regarding the Company's prospects or future financial condition, earnings, revenues, tax rates, capital expenditures, cash flows, expenses or other financial items, any statements concerning the Company's prospects or future operations, including management's plans or strategies and objectives therefor, and any assumptions, expectations or beliefs underlying the foregoing. These statements can sometimes be identified by the use of forward looking words such as "may," "will," "should," "anticipate," "assume," "believe," "plan," "project," "estimate," "expect," "intend," "continue," "pro forma," "forecast," "outlook," "propels," "opportunities," "potential," "provisional," or other similar expressions or the negative thereof. All statements other than statements of historical facts in this report or referred to in or incorporated by reference into this report are "forward-looking statements." These statements are based on current circumstances or expectations, but are subject to certain inherent risks and uncertainties, many of which are difficult to predict and beyond our control. Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, investors are cautioned that no assurance can be given that our expectations will prove correct. Actual results and developments may differ materially from the expectations expressed in or implied by these statements, based on various factors, including the impact of COVID-19 on the demand for our products and our financial results; changing consumption preferences relating to high fructose corn syrup and other products we make; the effects of global economic conditions and the general political, economic, business, and market conditions that affect customers and consumers in the various geographic regions and countries in which we buy our raw materials or manufacture or sell our products, including, particularly, economic, currency and political conditions inSouth America and economic and political conditions inEurope , and the impact these factors may have on our sales volumes, the pricing of our products and our ability to collect our receivables from customers; future financial performance of major industries which we serve and from which we derive a significant portion of our sales, including, without limitation, the food, beverage, animal nutrition, and brewing industries; the uncertainty of acceptance of products developed through genetic modification and biotechnology; our ability to develop or acquire new products and services at rates or of qualities sufficient to gain market acceptance; increased competitive and/or customer pressure in the corn-refining industry and related industries, including with respect to the markets and prices for our primary products and our co-products, particularly corn oil; the availability of raw materials, including potato starch, tapioca, gum Arabic, and the specific varieties of corn upon which some of our products are based, and our ability to pass along potential increases in the cost of corn or other raw materials to customers; energy costs and availability, including energy issues inPakistan ; our ability to contain costs, achieve budgets and realize expected synergies, including with respect to our ability to complete planned maintenance and investment projects on time and on budget and to achieve expected savings under our Cost Smart program as well as with respect to freight and shipping costs; the behavior of financial and capital markets, including with respect to foreign currency fluctuations, fluctuations in interest and exchange rates and market volatility and the associated risks of hedging against such fluctuations; our ability to successfully identify and complete acquisitions or strategic alliances on favorable terms as well as our ability to successfully integrate acquired businesses or implement and maintain strategic alliances and achieve anticipated synergies with respect to all of the foregoing; operating difficulties at our manufacturing facilities; the impact of impairment charges on our goodwill or long-lived assets; changes in our tax rates or exposure to additional income tax liability; our ability to maintain satisfactory labor relations; the impact on our business of natural disasters, war or similar acts of hostility, threats or acts of terrorism, the outbreak or continuation of pandemics such as COVID-19, or the occurrence of other significant events beyond our control; changes in government policy, law, or regulation and costs of legal compliance, including compliance with environmental regulation; potential effects of climate change; security breaches with respect to information technology systems, processes, and sites; our ability to raise funds at reasonable rates and other factors affecting our access to sufficient funds for future growth and expansion; volatility in the stock market and other factors that could adversely affect our stock price; risks affecting the continuation of our dividend policy; and our ability to remediate in a timely manner a material weakness in our internal control over financial reporting. 53 Table of Contents
Our forward-looking statements speak only as of the date on which they are made
and we do not undertake any obligation to update any forward-looking statement
to reflect events or circumstances after the date of the statement as a result
of new information or future events or developments. If we do update or correct
one or more of these statements, investors and others should not conclude that
we will make additional updates or corrections. For a further description of
these and other risks, see Item 1A. Risk Factors above and our subsequent
reports on Form 10-Q and Form 8-K.
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