Corn Products International, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The company operated in one business segment, producing starches, sweeteners and related ingredients. National Starch was acquired on October 1, 2010; its results are included for the fourth quarter only. Amounts below are in U.S. dollars.
Business context and material changes
- On October 1, the company acquired 100% of National Starch for $1.354 billion in cash, principally debt-funded. National Starch contributed $351 million of fourth-quarter sales and $8 million of net income; 2010 consolidated sales therefore do not reflect a full year of its operations.
- The acquisition expanded the specialty-starch portfolio and global reach. The company reported 37 manufacturing facilities in 15 countries and approximately 10,700 employees.
- Reported sales mix was 52% sweeteners, 28% starch products, and 20% co-products and other products. Sales by region: North America 56%, South America 28%, Asia/Africa 14%, and Europe 2%.
Financial performance
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net sales | $4.367 billion | $3.672 billion |
| Gross profit / margin | $724 million / 16.6% | $520 million / 14.2% |
| Operating income / margin | $339 million / 7.8% | $153 million / 4.2% |
| Net income attributable to CPI | $169 million | $41 million |
| Diluted EPS | $2.20 | $0.54 |
| Cash provided by operations | $394 million | $586 million |
| Capital expenditures | $159 million | $146 million |
| Cash and cash equivalents at year-end | $302 million | $175 million |
| Total debt at year-end | $1.769 billion | $544 million |
| Working capital at year-end | $862 million | $480 million |
Sales increased 19%, reflecting 21% higher volume and 4% favorable currency translation, partly offset by a 6% decline in price/product mix, primarily associated with lower corn costs. Gross corn costs per ton fell about 11%; energy costs rose about 14%. Management attributed earnings improvement to organic volume growth, lower corn costs, better plant utilization, stronger currencies, and the acquired business. Excluding specified acquisition, impairment/restructuring, inventory fair-value and financing charges, management said net income grew 65% and diluted EPS 61% year over year.
Fourth-quarter sales were $1.407 billion versus $959 million a year earlier; net income attributable to CPI was $52 million versus $56 million, and diluted EPS was $0.67 versus $0.74. 2010 results included $35 million of acquisition costs, $20 million of bridge-loan financing costs, a $27 million acquired-inventory fair-value charge, and $25 million of impairment/restructuring charges. The Chile-related charge was principally associated with earthquake damage and plant closure. The 2009 comparison included $125 million of impairment and restructuring charges, including a $119 million South Korea goodwill write-off.
Liquidity, debt and capital allocation
- Operating cash flow declined to $394 million from $586 million, chiefly because of the year-over-year change in working-capital cash flows and corn-hedging margin accounts. Investing cash outflow was $1.428 billion, including the acquisition; financing cash inflow was $1.155 billion.
- Year-end debt rose to $1.769 billion, primarily to finance National Starch. Cash was $302 million. The debt-to-adjusted-EBITDA ratio increased to 3.1 from 1.3; debt-to-capitalization rose to 43.9% from 22.8%.
- The company established a three-year, $1 billion revolving credit facility and had $275 million drawn at year-end. It also reported approximately $475 million of unused foreign operating lines. Credit agreements include leverage and interest-coverage covenants.
- Quarterly dividends remained $0.14 per share. Management expected operating cash flow and borrowing availability to cover planned capital spending, dividends and other strategies for the foreseeable future.
Outlook, risks and unusual items
- Management expected business growth in 2011 as economic recovery continued in many international markets, and forecast 2011 capital expenditures of approximately $280–$300 million. It aimed to reduce leverage toward its long-term debt-to-adjusted-EBITDA objective of below 2.25 and debt-to-capitalization target of 32–35%. These are objectives, not guarantees.
- Management expected to benefit from a full year of National Starch results and anticipated that earnings growth and debt reduction could move key performance metrics toward long-term targets. Integration, facility optimization and possible closures or asset redeployment remained execution considerations.
- Key risks include corn and energy price volatility, inability to pass input costs through to customers, co-product price exposure, competition, demand and consumer-preference changes, foreign exchange and political risks, plant reliability, labor relations, pension assumptions, taxes, and acquisition integration. Corn represents an estimated 40–65% of finished-product costs and energy about 12%.
- Capital commitments include $4.259 billion of disclosed contractual obligations, including $1.675 billion of long-term debt, $883 million of associated interest, $537 million of pension and postretirement obligations, and $968 million of purchase obligations. A Brazilian gas-supply agreement accounts for an estimated $228 million of minimum future expenditures through 2023.
- The company received $58.4 million from Mexico in January 2011 under a corrected NAFTA arbitration award; it said the amount would be recorded in first-quarter 2011, not 2010. The settlement ended pending post-award litigation and waived post-award interest.
- KPMG gave an unqualified opinion on the financial statements and internal control over financial reporting. The internal-control assessment and audit excluded National Starch, representing $351 million of 2010 sales and $1.95 billion of year-end assets.
Important facts for investors to verify
- National Starch integration progress, full-year contribution, realized synergies, and any facility rationalization or related charges.
- Debt reduction, covenant headroom, interest costs, and progress toward management’s leverage and capitalization objectives.
- Whether operating cash flow converts into sustainable free cash flow after the planned increase in capital expenditures and working-capital needs.
- Margin sensitivity to corn, energy and co-product prices, including the cash-flow timing and effectiveness of commodity hedges.
- Recognition and cash treatment of the $58.4 million Mexican award, and resolution of tax, pension, environmental and other contingencies.