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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
COMMISSION FILE NUMBER 1-13397
CORN PRODUCTS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
22-3514823
(I.R.S. Employer Identification Number)
5 WESTBROOK CORPORATE CENTER
WESTCHESTER, ILLINOIS 60154
(Address of principal executive offices) (Zip Code)
(708) 551-2600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 31, 2003
Common Stock, $.01 par value 36,049,948 shares
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CORN PRODUCTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2003 2002 2003 2002
----------------------- -----------------------
Net sales before shipping and handling costs $ 583.3 $ 514.7 $ 1,101.3 $ 972.6
Less: shipping and handling costs 44.0 28.5 82.6 54.4
----------------------- -----------------------
Net sales 539.3 486.2 1,018.7 918.2
Cost of sales 460.3 414.7 870.9 787.8
----------------------- -----------------------
Gross profit 79.0 71.5 147.8 130.4
Operating expenses 35.9 33.0 70.5 69.8
Earnings from non-consolidated affiliates and other income
(expense), net (0.7) 1.5 0.6 11.0
----------------------- -----------------------
Operating income 42.4 40.0 77.9 71.6
Financing costs 10.0 6.7 19.2 16.3
----------------------- -----------------------
Income before income taxes and minority interest 32.4 33.3 58.7 55.3
Provision for income taxes 11.7 12.0 21.1 19.9
----------------------- -----------------------
20.7 21.3 37.6 35.4
Minority interest in earnings 2.5 2.7 5.8 5.5
----------------------- -----------------------
Net income $ 18.2 $ 18.6 $ 31.8 $ 29.9
======================= =======================
Weighted average common shares outstanding:
Basic 36.0 35.6 35.9 35.5
Diluted 36.2 35.8 36.0 35.7
Earnings per common share:
Basic $ 0.50 $ 0.52 $ 0.88 $ 0.83
Diluted $ 0.50 $ 0.52 $ 0.88 $ 0.83
See Notes To Condensed Consolidated Financial Statements
1
PART I FINANCIAL INFORMATION
ITEM I
FINANCIAL STATEMENTS
CORN PRODUCTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS) JUNE 30, DECEMBER 31,
2003 2002
---------- -----------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 43 $ 36
Accounts receivable - net 257 244
Inventories 209 194
Prepaid expenses 8 11
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 517 485
- ----------------------------------------------------------------------------------------------------------------
Property, plant and equipment - net 1,177 1,154
Goodwill and other intangible assets 322 280
Deferred tax assets 33 33
Investments 28 26
Other assets 36 37
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,113 $ 2,015
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt $ 134 $ 84
Accounts payable and accrued liabilities 236 263
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 370 347
- ----------------------------------------------------------------------------------------------------------------
Non-current liabilities 72 68
Long-term debt 497 516
Deferred income taxes 178 163
Minority interest in subsidiaries 74 93
STOCKHOLDERS' EQUITY
Preferred stock - authorized 25,000,000 shares-
$0.01 par value - none issued -- --
Common stock - authorized 200,000,000 shares-
$0.01 par value - 37,659,887 shares issued
at June 30, 2003 and December 31, 2002 1 1
Additional paid in capital 1,073 1,073
Less: Treasury stock (common stock; 1,616,514 and 1,956,113 shares at
June 30, 2003 and December 31, 2002, respectively) at cost (38) (48)
Deferred compensation - restricted stock (3) (4)
Accumulated other comprehensive loss (359) (418)
Retained earnings 248 224
- ----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 922 828
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,113 $ 2,015
- ----------------------------------------------------------------------------------------------------------------
See Notes To Condensed Consolidated Financial Statements
2
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CORN PRODUCTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN MILLIONS) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2003 2002 2003 2002
------- ------- ------ ------
Net income $ 18 $ 19 $ 32 $ 30
Comprehensive income/loss:
Unrealized gains (losses) on cash flow
hedges, net of income tax effect of
$2, $3, $0.6 and $2, respectively (3) 7 (1) 4
Reclassification adjustment for (gains)
losses on cash flow hedges included
in net income, net of income tax
effect of $3, $5, $3 and $8,
respectively 6 9 6 16
Currency translation adjustment 46 (18) 54 (79)
---- ---- ---- ----
Comprehensive income (loss) $ 67 $ 17 $ 91 ($29)
==== ==== ==== ====
CORN PRODUCTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
(IN MILLIONS) ADDITIONAL OTHER
COMMON PAID-IN TREASURY DEFERRED COMPREHENSIVE RETAINED
STOCK CAPITAL STOCK COMPENSATION INCOME (LOSS) EARNINGS
--------------------------------------------------------------------------------------
Balance, December 31, 2002 $1 $1,073 $(48) $(4) $(418) $224
Net income for the period 32
Dividends declared (8)
Unrealized losses on
cash flow hedges, net
of income tax effect of
$0.6 (1)
Amount of losses on
cash flow hedges
reclassified to
earnings, net of
income tax effect
of $3 6
Currency translation
adjustment 54
Issuance of common stock
in connection with
acquisition 8
Issuance of common stock
on exercise of stock
options 2
Amortization to
compensation expense of
restricted common stock 1
--------------------------------------------------------------------------------------
Balance, June 30, 2003 $1 $1,073 $(38) $(3) $(359) $248
======================================================================================
See Notes To Condensed Consolidated Financial Statements
3
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CORN PRODUCTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS) SIX MONTHS ENDED JUNE 30,
2003 2002
---------- -----------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 32 $ 30
Non-cash charges (credits) to net income:
Depreciation 51 54
Minority interest in earnings 6 5
Earnings from non-consolidated affiliates - (2)
Gain on sale of business - (8)
Changes in working capital, net of effect of disposal:
Accounts receivable and prepaid items 7 8
Inventories (7) (3)
Accounts payable and accrued liabilities (27) 20
Other 3 5
- -------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 65 109
- -------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Capital expenditures, net of proceeds on disposal (27) (32)
Proceeds from sale of business - 35
Payments for acquisitions (48) (42)
- -------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (75) (39)
- -------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from borrowings 41 9
Payments on debt (16) (82)
Dividends paid (11) (11)
Issuance of common stock 2 3
- -------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities 16 (81)
- -------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash 1 (3)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 7 (14)
Cash and cash equivalents, beginning of period 36 65
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 43 $ 51
- -------------------------------------------------------------------------------------------------------------------
See Notes To Condensed Consolidated Financial Statements
4
CORN PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
References to the "Company" are to Corn Products International, Inc.
and its consolidated subsidiaries. These statements should be read in
conjunction with the consolidated financial statements and the related notes to
those statements contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
The unaudited condensed consolidated interim financial statements
included herein were prepared by management and reflect all adjustments
(consisting solely of normal recurring items) which are, in the opinion of
management, necessary to present a fair statement of results of operations and
cash flows for the interim periods ended June 30, 2003 and 2002, and the
financial position of the Company as of June 30, 2003. The results for the
interim periods are not necessarily indicative of the results expected for the
full years.
2. ACQUISITIONS
On March 27, 2003, the Company increased its ownership in its Southern
Cone of South America businesses to 100 percent by purchasing an additional
27.76 percent ownership interest from the minority interest shareholders. The
Company paid $53 million to acquire the additional ownership interest,
consisting of $45 million in cash and the issuance of 271 thousand shares of
common stock valued at $8 million. Goodwill of approximately $37 million was
recorded.
5
3. STOCK-BASED COMPENSATION
The Company accounts for stock compensation using the recognition and
measurement principles of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Employee compensation cost related to restricted stock grants is recognized
ratably over the vesting period.
Amounts charged to compensation expense for amortization of restricted
stock for the three months ended June 30, 2003 and 2002 were $0.3 million and
$0.2 million, respectively, and $0.7 million and $0.5 million for the six months
ended June 30, 2003 and 2002, respectively. However, no employee compensation
cost related to common stock options is reflected in net income, as each option
granted under the Company's plan had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per common share assuming the
Company had applied the fair value based recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," to all awards of common stock options for the three and six
months ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
(in millions, except per share amounts) 2003 2002 2003 2002
------- -------- ------- -------
Net income, as reported .................................. $ 18.2 $ 18.6 $ 31.8 $ 29.9
Deduct: Stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects .............................................. (0.3) (0.5) (0.6) (1.0)
------ ------ ------ ------
Pro forma net income ..................................... $ 17.9 $ 18.1 $ 31.2 $ 28.9
====== ====== ====== ======
Earnings per common share:
Basic - as reported ...................................... $ 0.50 $ 0.52 $ 0.88 $ 0.83
Basic - pro forma ........................................ $ 0.49 $ 0.51 $ 0.86 $ 0.80
Diluted - as reported .................................... $ 0.50 $ 0.52 $ 0.88 $ 0.83
Diluted - pro forma ...................................... $ 0.49 $ 0.51 $ 0.86 $ 0.80
4. ADOPTION OF NEW ACCOUNTING STANDARDS
On January 1, 2003, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), which addresses financial accounting and reporting
for legal obligations associated with the retirement of tangible long-lived
assets and the related asset retirement costs. The adoption of SFAS 143 did not
have a significant effect on the Company's consolidated financial statements.
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS 146 replaces EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other
6
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". The adoption of SFAS 146 did not have a significant effect on
the Company's consolidated financial statements.
Also on January 1, 2003, the Company adopted the recognition and
measurement provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which addresses financial accounting and reporting for obligations under certain
guarantees. FIN 45 requires, among other things, that a guarantor recognize a
liability for the fair value of an obligation undertaken in issuing a guarantee,
under certain circumstances. The recognition and measurement provisions of FIN
45 are required to be applied prospectively to guarantees issued or modified
after December 31, 2002. The adoption of FIN 45 did not have a significant
effect on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123" ("SFAS 148"). SFAS 148 amends SFAS 123 to provide alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements under SFAS 123 to require prominent disclosures in
both annual and interim financial statements. The interim period disclosures
required by SFAS 148 are provided in Note 3.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which addresses the consolidation of
variable interest entities as defined in the Interpretation. The application of
FIN 46 did not have a material effect on the Company's consolidated financial
statements.
In May 2003, the FASB ratified the consensus reached by the Emerging
Issues Task Force ("EITF") in EITF issue 03-4, "Accounting for Cash Balance
Pension Plans", which among other things, requires that a cash balance pension
plan be considered a defined benefit plan for purposes of applying SFAS 87. The
Company will apply the provisions of EITF 03-4 effective with the next pension
plan measurement date.
5. INVENTORIES
Inventories are summarized as follows:
(in millions) At At
June 30, December 31,
2003 2002
-------- ------------
Finished and in process ............. $103 $ 89
Raw materials ....................... 73 76
Manufacturing supplies and other .... 33 29
---- ----
Total ............................... $209 $194
==== ====
6. SEGMENT INFORMATION
The Company operates in one business segment, corn refining, and is
managed on a geographic regional basis. Its North America operations include
corn-refining businesses in the United States, Canada and Mexico and, prior to
the December 2002 dissolution of CornProductsMCP Sweeteners LLC, its
non-consolidated equity interest in that entity. This
7
region also included Enzyme Bio-Systems Ltd. until it was sold in February 2002.
The Company's South America operations include corn-refining businesses in
Brazil, Colombia, Ecuador and the Southern Cone of South America, which includes
Argentina, Chile and Uruguay. The Company's Asia/Africa operations include
corn-refining businesses in Korea, Pakistan, Malaysia, Thailand and Kenya.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
(in millions) 2003 2002 2003 2002
----------------------- ----------------------
Net Sales
North America ................ $ 345.9 $ 318.3 $ 653.2 $ 594.2
South America ................ 119.3 102.2 224.7 200.4
Asia/Africa .................. 74.1 65.7 140.8 123.6
---------------------- ----------------------
Total $ 539.3 $ 486.2 $1,018.7 $ 918.2
====================== ======================
Operating Income
North America ................ $ 14.4 $ 17.0 $ 26.3 $ 23.8
South America ................ 20.3 14.9 36.6 28.6
Asia/Africa .................. 14.6 14.0 28.1 25.9
Corporate .................... (6.9) (5.9) (13.1) (11.3)
Non-recurring income, net .... -- -- -- 4.6
---------------------- ----------------------
Total .......................... $ 42.4 $ 40.0 $ 77.9 $ 71.6
====================== ======================
At At
(in millions) June 30, 2003 December 31, 2002
------------- -----------------
Total Assets
North America .... $1,321 $1,316
South America .... 442 360
Asia/Africa ...... 350 339
------ ------
Total .............. $2,113 $2,015
====== ======
8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003
WITH COMPARATIVES FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002
NET INCOME. Net income for the quarter ended June 30, 2003 decreased
$0.4 million to $18.2 million, or $0.50 per diluted share, from $18.6 million,
or $0.52 per diluted share, in the second quarter of 2002. The decrease in net
income principally reflects higher financing costs, which more than offset an
increase in operating income. Operating income increased despite the absence of
high fructose corn syrup ("HFCS") sales to the soft drink industry in Mexico
related to the discriminatory tax on beverages sweetened with HFCS in that
country. Net income for the six months ended June 30, 2003 increased to $31.8
million, or $0.88 per diluted share, from $29.9 million, or $0.83 per diluted
share, in the prior year period. The prior period results include $4.6 million
($3.0 million after-tax, or $0.08 per diluted share) of earnings consisting
primarily of a gain from the sale of Enzyme Bio-Systems Ltd. ("EBS"), net of
restructuring charges. The year-over-year increase in earnings principally
reflects sales volume growth in each of our regions and improved price/product
mix, which more than offset higher financing costs.
NET SALES. Second quarter 2003 net sales totaled $539 million, up 11
percent from second quarter 2002 net sales of $486 million. This increase
reflects a 13 percent price/product mix improvement and a slight volume
increase, which more than offset a 3 percent reduction attributable to weaker
foreign currencies. First half 2003 net sales totaled $1,019 million, up 11
percent from first half 2002 net sales of $918 million. This increase reflects a
15 percent price/product mix improvement and a 3 percent volume increase,
partially offset by a 7 percent reduction attributable to weaker foreign
currencies.
North America net sales for second quarter 2003 were up 9 percent from
the same period last year, primarily reflecting increased sales in the United
States. A 12 percent price/product mix improvement in the North America region
more than offset the effect of a volume reduction largely attributable to the
discriminatory tax on beverages sweetened with HFCS in Mexico. See below for a
discussion of the Mexican tax on beverages sweetened with HFCS. For the six
months ended June 30, 2003, North American net sales grew 10 percent. This
increase reflects an 11 percent price/product mix improvement and 1 percent
volume growth, partially offset by the effect of a weaker Mexican peso in the
region.
South America net sales for second quarter 2003 increased 17 percent
from the year-ago period as price/product mix improvements of 29 percent have
more than offset a 15 percent reduction attributable to weaker average local
currencies. Additionally, higher volume contributed 3 percent to the regional
sales increase. For the six months ended June 30, 2003, South America net sales
were up 12 percent from the prior year period. This increase reflects a 38
percent price/product mix improvement and 3 percent volume growth, partially
offset by a 29 percent reduction attributable to weaker average local
currencies.
9
Asia/Africa net sales for second quarter 2003 were up 13 percent from
the year-ago period, reflecting 12 percent volume growth and a 4 percent
increase attributable to stronger local currencies, which more than offset a 3
percent price/product mix reduction. For the six months ended June 30, 2003,
Asia/Africa net sales rose 14 percent. This increase reflects 12 percent volume
growth and stronger local currencies, partially offset by a price/product mix
decline of 3 percent.
COST OF SALES AND OPERATING EXPENSES. Cost of sales for second quarter
2003 was up 11 percent from second quarter 2002 mainly due to higher corn costs
and increased volume. Our gross profit percentage was 14.7 percent, unchanged
from last year. First half 2003 gross profit percentage increased to 14.5
percent from 14.2 percent in the prior year period, principally due to improved
product selling prices.
Second quarter 2003 operating expenses increased to $35.9 million from
$33.0 million last year. Second quarter 2003 operating expenses, as a percentage
of net sales, declined to 6.7 percent from 6.8 percent a year ago, as we
continue to focus on cost control while growing our business. First half 2003
operating expenses increased to $70.5 million from $69.8 million last year,
which included $3.4 million of net restructuring charges. First half 2003
operating expenses, as a percentage of net sales, declined to 6.9 percent from
7.6 percent a year ago. Operating expenses for 2003 include higher insurance
premiums and increased costs associated with the implementation of the
provisions of the Sarbanes-Oxley Act of 2002.
EARNINGS FROM NON-CONSOLIDATED AFFILIATES AND OTHER INCOME / EXPENSE.
The $2.2 million decline in this item from second quarter 2002 mainly reflects a
reduction in earnings from non-consolidated affiliates attributable to the
cessation, in December 2002, of the operations of CPMCP and the recording, in
the current year period, of a $1 million charge associated with the closing of
our plant in Malaysia. The $10.4 million decline in this item from the first
half of 2002 mainly reflects last year's $8 million pretax gain from the sale of
EBS, and to a lesser extent, a reduction in earnings from non-consolidated
affiliates.
OPERATING INCOME. Second quarter 2003 operating income increased 6
percent to $42.4 million from $40.0 million a year ago, as increased earnings in
South America and Asia/ Africa more than offset a decline in North America.
North America operating income of $14.4 million decreased 15 percent from $17.0
million in the second quarter of 2002, primarily due to lower earnings in Mexico
that more than offset earnings growth in the rest of the region. The lower
earnings in Mexico reflect the absence of higher margin HFCS sales to the soft
drink industry due to the aforementioned discriminatory tax on beverages
sweetened with HFCS. South America operating income of $20.3 million for second
quarter 2003 increased 36 percent from $14.9 million in the prior year period,
reflecting earnings growth in the Southern Cone of South America and Brazil.
Asia/Africa operating income increased 4 percent to $14.6 million from $14.0
million a year ago, despite the recording in the current year period of the
aforementioned $1 million charge in Malaysia. The improved earnings in the
region principally reflect higher volumes and favorable effects from currency
translation attributable to stronger Asian currencies.
First half 2003 operating income grew 9 percent to $77.9 million from
$71.6 million a year ago, as earnings increased in each of our regions. North
America operating income of $26.3 million increased 11 percent from $23.8
million in the first half of 2002, as significantly higher earnings in the
United States more than offset lower results in Mexico. South America operating
income of $36.6 million for first half 2003 increased 28 percent from $28.6
million in
10
the prior year period, reflecting earnings growth in the Southern Cone of South
America and Brazil. Asia/Africa operating income increased 8 percent to $28.1
million from $25.9 million a year ago. The improved earnings principally reflect
higher volumes throughout the region and favorable effects from currency
translation attributable to stronger Asian currencies.
FINANCING COSTS. Financing costs for the second quarter and first half
of 2003 increased 49 percent and 18 percent, respectively, from the year-ago
periods. These increases primarily reflect higher interest rates associated with
our 2002 debt refinancing to extend maturities. Reduced average indebtedness and
foreign currency transaction gains partially offset the impact of the higher
interest rates.
PROVISION FOR INCOME TAXES. The effective income tax rate for the three
months and six months ended June 30, 2003 was 36 percent, unchanged from the
prior year periods.
MINORITY INTEREST IN EARNINGS. The modest decrease in minority interest
for second quarter 2003 from the prior year period primarily reflects the effect
of our March 2003 purchase of the remaining minority interest in our now
wholly-owned Southern Cone of South America businesses, partially offset by
increased results in Pakistan and Thailand. The slight increase in minority
interest for first half 2003 over the year-ago period primarily reflects
increased results in Pakistan and Korea, partially offset by the effects of our
purchases of the minority interest in our now wholly-owned Mexican and Southern
Cone of South America businesses.
COMPREHENSIVE INCOME (LOSS). The Company recorded comprehensive income
of $67 million for the second quarter of 2003, as compared with comprehensive
income of $17 million for the same period last year. For the first half of 2003,
the Company recorded comprehensive income of $91 million, as compared with a
comprehensive loss of $29 million a year ago. These increases were mainly
attributable to favorable variances in the currency translation adjustment,
partially offset by losses on cash flow hedges. The favorable variances in the
currency translation adjustment primarily reflect the effects of stronger local
currencies, particularly in South America.
MEXICAN TAX ON BEVERAGES SWEETENED WITH HFCS/RECOVERABILITY OF MEXICAN ASSETS
On January 1, 2002, a discriminatory tax on soft drinks sweetened with
high fructose corn syrup (HFCS) approved by the Mexican Congress late in 2001,
became effective. This tax was temporarily suspended on March 5, 2002. In
response to the enactment of the tax, which at the time effectively ended the
use of HFCS for soft drinks in Mexico, we ceased production of HFCS 55 at our
San Juan del Rio plant, one of our four plants in Mexico. Effective with the
March 5, 2002 suspension of the tax, we resumed the production and sale of HFCS
in Mexico, although at levels below historical volumes. On July 12, 2002, the
Mexican Supreme Court annulled the temporary suspension of the tax, thereby
resuming the tax, and we curtailed the production of HFCS 55 at our San Juan del
Rio plant. On December 10, 2002, the Mexican Congress declined to repeal the
controversial tax on soft drinks sweetened with HFCS, and as a result, the tax
continues to be in effect.
As previously reported, we are disappointed with the Mexican Congress'
decision to retain the imposition of the tax and continue to explore all options
for resolving the situation and minimizing any potential long-term negative
financial impact that might occur. We continue to engage in discussions
regarding the matter with both U.S. and Mexican government trade officials, and
received informal assurances from both sides that repeal of the tax is a
condition
11
precedent to resolving certain trade issues between the countries. Since the
imposition of the tax, these same officials have continued to imply that a
resolution of these matters is expected in the near term. However, we cannot
predict with any certainty whether these trade matters will ultimately be
resolved, or the likelihood or timing of repeal of the tax on soft drinks
sweetened with HFCS. In the meantime, we are attempting to mitigate the negative
effects of the tax on HFCS demand in Mexico by exploring other markets for our
HFCS production capability in and around Mexico. We are also continuing the
restructuring of our Mexican operations in an effort to improve efficiency and
reduce operating costs. We also initiated formal action to seek compensation for
damages to our Mexican operations under the provisions of the North American
Free Trade Agreement (NAFTA).
On January 28, 2003, we notified the Government of Mexico of our
intention to submit to arbitration a claim for compensation under the investment
provisions of the NAFTA. We believe that the Government of Mexico has violated
certain of its obligations with respect to foreign investors under the NAFTA,
including those regarding non-discriminatory treatment and expropriations. The
claim, which approximates $250 million, seeks compensation for past and
potential lost profits and other costs related to our operations in Mexico, as
well as our costs in pursuing resolution of this matter. The filing of the
notice of intent is the first step in pursuing the resolution of an investment
dispute. The NAFTA requires the Company to serve written notice of its intention
to make the claim at least three months prior to submitting the claim to
arbitration. Under NAFTA the Company could only submit its expropriation claim
to arbitration if this claim were not vetoed by designated United States and
Mexican authorities in the six months following transmission of the notice of
intent. This period has lapsed without a veto of the claim by the United States
authorities. Accordingly, at this time, the Company expects to file the
expropriation claim with its other claims.
Until there is a favorable resolution of the Mexican tax on soft drinks
sweetened with HFCS, we expect that we will be unable to make any significant
sales of HFCS to the soft drink industry in Mexico. Management continues to seek
a permanent repeal of the tax and currently believes that the matter will
ultimately be resolved through negotiations between the governments of the
United States and Mexico. Until that occurs, however, our operating results and
cash flows will continue to be adversely affected by the Mexican tax on soft
drinks sweetened with HFCS.
Our ability to fully recover the carrying value of our long-term
investment in Mexico, which consists primarily of goodwill and property, plant
and equipment associated with our Mexican operations, is dependent upon the
generation of sufficient cash flows from the use or other disposition of these
assets. The Company's ability to generate these cash flows will be significantly
affected by a variety of factors, including the timing and permanence of a
repeal, if any, of the tax on soft drinks sweetened with HFCS, the timing and
extent of any recovery in the demand for HFCS by the Mexican soft drink
industry, the extent to which alternative markets for HFCS develop in and around
Mexico, the success of the Company's restructuring activities in Mexico, and the
amount of the proceeds received from the resolution of the Company's NAFTA claim
against the Government of Mexico, if any, as well as by management's ability to
develop and implement a successful long-term business strategy in Mexico. Based
on our long-term forecasts of operating results, we believe that the Company
will generate sufficient cash flows from the use or other disposition of these
long-term assets to fully recover their carrying values. In developing our
estimates of the cash flows that will be generated from the Company's Mexican
operations, we have assumed that the tax on soft drinks sweetened with HFCS will
be permanently repealed in the near future, and that sales of HFCS to the
Mexican soft drink
12
industry will return to the levels realized prior to the imposition of the tax
by the end of 2003. Under these assumptions about future HFCS sales in Mexico,
the estimated fair value of the Company's Mexican business exceeds its carrying
amount by approximately $90 million. These assumptions are subject to change
based on business conditions and the results of the impairment calculations
could be significantly different if performed at a later date. In the event
actual results differ from those assumed, the Company could be required to
recognize an impairment of goodwill and property, plant and equipment, and the
amount of such impairment could be material.
We could have used different assumptions in making our estimates of
future operating results and cash flows in making our impairment calculations
related to our Mexican business. For example, if we assumed that the tax on soft
drinks sweetened with HFCS would not be repealed, our projections of future cash
flows in Mexico would be materially different. While we believe that the tax
will ultimately be repealed, we have nevertheless begun to develop, and in some
cases to implement, an alternative business strategy with respect to our Mexican
operations in the event the tax is not rescinded. This strategy includes, among
other things, the following: (i) developing new uses and new customers for HFCS;
(ii) increasing sales of our current product portfolio, as well as developing
new products for the region; (iii) investing capital to increase production
output for current and new products; (iv) exploring the potential transfer of
certain HFCS equipment to plants outside of Mexico; and (v) continuing our cost
reduction program. Based on our projections of operating results and cash flows
that would be generated under this alternative business model for our Mexican
operations, we may be required to record an impairment charge to write-down the
carrying value of goodwill in the event the tax is not repealed.
In concluding that an impairment of our Mexican goodwill may arise if
the tax on soft drinks sweetened with HFCS is not repealed, we assumed that no
proceeds will be received from our claim for compensation under NAFTA against
the Mexican Government. Any recovery we receive from the resolution of this
claim would reduce or offset, in whole or in part, the amount of any impairment
to be recognized. However, no assurance can be made that we will be successful
in recovering damages.
The Company is continuing its efforts to gain repeal of the tax, and at
the same time, pursuing the implementation of the alternative business
strategies outlined above. However, since the time the assumptions supporting
the cash flow estimates referred to above were made, there have been no formal
actions toward the repeal of the tax on soft drinks sweetened with HFCS. While
the Company continues to believe that the tax will be repealed and that the
profitability of the Mexican operations will return to pre-2002 levels, the
Company will continue to reevaluate certain of the key assumptions underlying
our cash flow projections, including the impact on such assumptions, of the lack
of positive developments in the near future. We believe the continued lack of
meaningful progress in negotiations with the Mexican Government would increase
the likelihood that an impairment charge would be required. The amount of such
non-cash charge, if any, will depend on the cash flow factors identified above.
The carrying value of the goodwill related to the Company's Mexican operations
was approximately $120 million at June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company's total assets increased to $2,113
million from $2,015 million at December 31, 2002. The increase in total assets
mainly reflects translation effects
13
associated with stronger local currencies, particularly in South America, and
the recording of $37 million of goodwill related to our purchase of the minority
interest in our Southern Cone of South America businesses.
For the six months ended June 30, 2003, cash provided by operating
activities was $65 million, compared to $109 million in the prior year period.
The decline in operating cash flow was principally due to a larger year over
year increase in working capital activities. Operating cash flows for the prior
year period reflected the more immediate cash flow benefits associated with the
initial implementation of improved working capital management processes. Cash
used for investing activities totaled $75 million for the first half of 2003,
reflecting acquisition-related payments and capital expenditures. Capital
expenditures of $27 million for the first six months of 2003 are in line with
the Company's capital spending plan for the year, which is currently expected to
approximate $80 million for full year 2003.
The Company has a $125 million, 3-year revolving credit facility in the
United States due October 2005. In addition, the Company has a number of
short-term credit facilities consisting of operating lines of credit. At June
30, 2003, the Company had total debt outstanding of $631 million, down $33
million from March 31, 2003, but up from $600 million at December 31, 2002. The
increase mainly reflects borrowings made during the first quarter to fund the
cash portion of the purchase price of the previously mentioned acquisition of
the minority interest in our Southern Cone of South America businesses. The debt
outstanding includes: $20 million outstanding under the U.S. revolving credit
facility at a weighted average interest rate of approximately 2.5 percent at
June 30, 2003; $255 million (face amount) of 8.25 percent senior notes due 2007;
$200 million (face amount) of 8.45 percent senior notes due 2009; and various
affiliate indebtedness totaling $159 million, which includes borrowings
outstanding under local country operating credit lines. Approximately $133
million of the affiliate debt represents short-term borrowings. The weighted
average interest rate on affiliate debt was approximately 6.3 percent for the
first six months of 2003. The Company has interest rate swap agreements that
effectively convert the interest rate associated with the Company's 8.45 percent
senior notes to a variable interest rate. The fair value of these interest rate
swap agreements ($33 million at June 30, 2003 and $27 million at December 31,
2002) is reflected in the Condensed Consolidated Balance Sheets as an offset to
the increase in the fair value of the hedged debt obligation.
On May 21, 2003, the Company's board of directors declared a quarterly
cash dividend of $0.10 per share of common stock. The cash dividend was paid on
July 25, 2003 to stockholders of record at the close of business on June 30,
2003.
On July 18, 2003, the Company announced that it is proposing a $100
million capital project to replace certain boilers at its Argo plant, located in
Bedford Park, Illinois. The proposed project will include the shutdown and
replacement of the plant's three current coal-fired boilers with one
environmentally sound coal-fired boiler. This project will also reduce the
plant's emissions as well as provide more efficient and effective energy
production. The project, currently in engineering stages, has not yet reached
the point of seeking Illinois Environmental Protection Agency ("IEPA") review.
Pending receipt of an IEPA permit, ground breaking on the project is anticipated
to begin in the second half of 2004 and the project is expected to be completed
in the second quarter of 2006. It is expected that the project will be funded
from operating cash flows and, if necessary, from credit line borrowings or
other sources of liquidity.
14
The Company expects that its operating cash flows and borrowing
availability under its credit facilities will be more than sufficient to fund
its anticipated capital expenditures, dividends and other investing and/or
financing strategies for the foreseeable future.
MINORITY INTEREST IN SUBSIDIARIES. Minority interest in subsidiaries
decreased to $74 million at June 30, 2003 from $93 million at December 31, 2002.
The decrease is mainly attributable to our purchase of the minority interest in
our Southern Cone of South America businesses. Effective with the purchase, the
Southern Cone businesses are now wholly-owned subsidiaries of the Company.
NEW ACCOUNTING STANDARDS
In April 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149"), which amends and clarifies
financial accounting and reporting for derivative instruments and for hedging
activities accounted for under SFAS 133. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company is required to adopt SFAS 149
effective July 1, 2003. The impact of the adoption of SFAS 149, if any, is not
expected to be significant.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"), which addresses accounting and financial reporting for certain
types of financial instruments with characteristics of both liabilities and
equity. The Company is required to adopt SFAS 150 effective July 1, 2003. The
impact of the adoption of SFAS 150, if any, is not expected to be significant.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains or may contain forward-looking statements
concerning the Company's financial position, business and future earnings and
prospects, in addition to other statements using words such as "anticipate,"
"believe," "plan," "estimate," "expect," "intend" and other similar expressions.
These statements contain certain inherent risks and uncertainties. Although we
believe our expectations reflected in these forward-looking statements are based
on reasonable assumptions, stockholders are cautioned that no assurance can be
given that our expectations will prove correct. Actual results and developments
may differ materially from the expectations conveyed in these statements, based
on factors such as the following: fluctuations in worldwide commodities markets
and the associated risks of hedging against such fluctuations; fluctuations in
aggregate industry supply and market demand; general political, economic,
business, market and weather conditions in the various geographic regions and
countries in which we manufacture and sell our products, including fluctuations
in the value of local currencies, energy costs and availability and changes in
regulatory controls regarding quotas, tariffs, taxes and biotechnology issues;
increased competitive and/or customer pressure in the corn-refining industry;
the outbreak or continuation of hostilities; stock market fluctuation and
volatility; and the resolution of the current uncertainties relating to the
Mexican HFCS tax. 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. 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 risk factors, see the Company's most
recently filed Annual Report on Form 10-K and subsequent reports on Forms 10-Q
or 8-K.
15
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is set forth in the Company's Annual Report on Form
10-K for the year ended December 31, 2002, and is incorporated herein by
reference. There have been no material changes to the Company's market risk
during the six months ended June 30, 2003.
ITEM 4
CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer performed
an evaluation of the effectiveness of the Company's disclosure controls and
procedures as of June 30, 2003. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in ensuring that all material information
required to be filed in this quarterly report has been made known to them in a
timely fashion. There have been no changes in the Company's internal controls
over financial reporting that were identified during the evaluation that
occurred during the Company's last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal controls
over financial reporting.
16
PART II OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on May 15, 2003, the following
matters were submitted to a vote of security holders. The number of votes cast
for, against, or withheld and the number of abstentions as to each such matter
were as follows:
1. ELECTION OF DIRECTORS
The following nominees for election as Directors of the Company were elected for
terms expiring in the year indicated:
Name Term Expires Votes For Votes Withheld
---- ------------ ---------- --------------
Luis Aranguren-Trellez 2006 32,654,738 538,552
Ronald M. Gross 2006 32,049,784 1,143,506
William S. Norman 2006 32,048,919 1,144,371
Clifford B. Storms 2006 32,648,519 544,771
The following other Directors of the Company are continuing in office for terms
expiring in the year indicated:
Name Term Expires
---- ------------
Richard J. Almeida 2005
Alfred C. DeCrane, Jr. 2005
Guenther E. Greiner 2005
Karen L. Hendricks 2004
Bernard H. Kastory 2004
James M. Ringler 2005
Samuel C. Scott III 2004
2. APPROVAL OF CORN PRODUCTS INTERNATIONAL, INC. 1998 STOCK INCENTIVE PLAN
The stockholders approved the Company's 1998 Stock Incentive Plan, as amended
and restated, with 23,785,006 votes cast in favor, 6,181,406 votes cast against
and 180,120 votes abstained.
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The stockholders ratified the appointment of KPMG LLP as independent auditors
for the Company for 2003 with 32,905,611 votes cast in favor, 241,505 votes cast
against and 46,169 votes abstained.
17
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index hereto.
b) Reports on Form 8-K
On April 22, 2003, a report was filed disclosing the Company's first
quarter 2003 earnings release dated April 22, 2003.
All other items hereunder are omitted because either such item is inapplicable
or the response is negative.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORN PRODUCTS INTERNATIONAL, INC.
DATE: August 12, 2003 By /s/ James W. Ripley
-------------------------------
James W. Ripley
Vice President and Chief
Financial Officer
DATE: August 12, 2003 By /s/ Robin A. Kornmeyer
-------------------------------
Robin A. Kornmeyer
Vice President and Controller
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EXHIBIT INDEX
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
4 Corn Products International, Inc. 1998 Stock Incentive Plan (as
amended and restated February 12, 2003) filed as Exhibit 4 (d) to
the Registration Statement on Form S-8, file number 333-105660, is
hereby incorporated by reference
11 Statement re: computation of earnings per share
31.1 CEO Section 302 Certification Pursuant to the Sarbanes-Oxley Act of
2002
31.2 CFO Section 302 Certification Pursuant to the Sarbanes-Oxley Act of
2002
32.1 CEO Certification Pursuant to Section 1350 of Chapter 63 of Title 18
of the United States Code as created by the Sarbanes-Oxley Act of
2002
32.2 CFO Certification Pursuant to Section 1350 of Chapter 63 of Title 18
of the United States Code as created by the Sarbanes-Oxley Act of
2002
20