| CORN PRODUCTS INTERNATIONAL INC ITEM 1A RISK FACTORS The Company operates in one business segment, corn refining, and the business is managed on a geographic regional basis |
| In each country where we conduct business, our business and assets are subject to varying degrees of risk and uncertainty |
| The following are factors that we believe could cause our actual results to differ materially from expected and historical results |
| Additional risks that are currently unknown to us may also impair our business or adversely affect our financial condition or results of operations |
| In addition, forward-looking statements within the meaning of the federal securities laws that are contained in this Form 10-K or in other filings or statements made by the Company may be subject to the risks described below as well as other risks and uncertainties |
| Please read the cautionary notice regarding forward-looking statements in Item 7 below |
| The Company operates a multinational business subject to the economic, political and other risks inherent in operating in foreign countries and with foreign currencies |
| The Company has operated in foreign countries and with foreign currencies for many years |
| The Company’s US dollar denominated results are subject to foreign currency exchange fluctuations and its operations are subject to political, economic and other risks |
| Economic changes, terrorist activity and political unrest may result in business interruption or decreased demand for the Company’s products |
| Protectionist trade measures and import and export licensing requirements could also adversely affect the Company’s results of operations |
| The Company’s success will depend in part on its ability to manage continued global political and/or economic uncertainty |
| The Company primarily sells world commodities and, historically, local prices have adjusted relatively quickly to offset the effect of a local currency devaluation |
| The Company may hedge transactions that are denominated in a currency other than the currency of the operating unit entering into the underlying transaction and is subject to the risks normally attendant to such hedging activities |
| Raw material and energy price fluctuations, and supply interruptions and shortages could adversely affect the Company’s results of operations |
| The Company’s finished products are made primarily from corn |
| Purchased corn accounts for between 40 percent and 65 percent of finished product costs |
| Energy costs represent approximately 14 percent of the Company’s finished product costs |
| The primary use of energy is to create steam in the production process and in dryers to dry product |
| The Company consumes coal, natural gas, electricity, wood and fuel oil to generate energy |
| The market prices for these commodities vary depending on supply and demand, world economies and other factors |
| The Company purchases these commodities based on its anticipated usage and the future outlook for these costs |
| The Company cannot assure that it will be able to purchase these commodities at prices that it can adequately pass on to customers to sustain or increase profitability |
| In the US and Canada, the Company sells a large portion of finished product at firm prices established in supply contracts typically lasting for periods of up to one year |
| In order to minimize the effect of volatility in the cost of corn related to these firm-priced supply contracts, the Company takes hedging positions by entering into corn futures contracts |
| From time to time, the Company may also enter into anticipatory hedges |
| These contracts typically mature within one year |
| At expiration, the Company settles the derivative contracts at a net amount equal to the difference between the then-current price of corn and the fixed contract price |
| While these hedging instruments are subject to fluctuations in value, changes in the value of the underlying exposures the Company is hedging generally offset such 11 _________________________________________________________________ [48]Table of Contents fluctuations |
| While the corn futures contracts or hedging positions are intended to minimize the volatility of corn costs on operating profits, occasionally the hedging activity can result in losses, some of which may be material |
| Outside of North America, sales of finished product under long-term, firm-priced supply contracts are not material |
| The Company also periodically uses derivative financial instruments to hedge portions of its natural gas costs, primarily in its North American operations |
| The Company’s ability to generate an adequate return on investment is uncertain |
| The Company’s ability to generate operating income and to increase profitability depends to a large extent upon its ability to price finished products at a level that will cover manufacturing and raw material costs and provide a profit margin |
| The Company’s ability to maintain appropriate price levels is determined by a number of factors largely beyond the Company’s control, such as aggregate industry supply and market demand, which may vary from time to time, and the economic condition of the geographic region of the Company’s operations |
| The Company’s inability to contain costs could adversely affect its future profitability and growth |
| The Company’s future profitability and growth depends on the Company’s ability to contain operating costs and per-unit product costs and to maintain and/or implement effective cost control programs, while at the same time maintaining competitive pricing and superior quality products, customer service and support |
| The Company’s ability to maintain a competitive cost structure depends on continued containment of manufacturing, delivery and administrative costs as well as the implementation of cost-effective purchasing programs for raw materials, energy and related manufacturing requirements |
| If the Company is unable to contain its operating costs and maintain the productivity and reliability of its production facilities, the profitability and growth of the Company could be adversely affected |
| The Company may not have access to the funds required for future growth and expansion |
| The Company may need additional funds for working capital to grow and expand its operations |
| To the extent possible, the Company expects to fund its capital expenditures from operating cash flow |
| If the Company’s operating cash flow is insufficient to fund such expenditures, the Company may either reduce its capital expenditures or utilize certain general credit facilities |
| The Company may also seek to generate additional liquidity through the sale of debt or equity securities in private or public markets or through the sale of non-productive assets |
| The Company cannot provide any assurance that cash flows from operations will be sufficient to fund anticipated capital expenditures or that additional funds can be obtained from financial markets or from the sale of assets at terms favorable to the Company |
| If the Company is unable to generate sufficient cash flows or raise sufficient additional funds to cover capital expenditures, it may not be able to achieve its desired operating efficiencies and expansion plans, which may adversely impact the Company’s competitiveness and, therefore, its results of operations |
| Increased interest rates could increase our borrowing costs |
| From time to time the Company may issue securities to finance acquisitions, capital expenditures, working capital and for other general corporate purposes |
| An increase in interest rates in the general economy could result in an increase in the Company’s borrowing costs for these financings, as well as under any existing debt that bears interest at an unhedged floating rate |
| 12 _________________________________________________________________ [49]Table of Contents The Company operates in a highly competitive environment and it may be difficult to preserve operating margins and maintain market share |
| The Company operates in a highly competitive environment |
| Almost all of the Company’s products compete with virtually identical or similar products manufactured by other companies in the corn refining industry |
| In the United States, there are other corn refiners, several of which are divisions of larger enterprises that have greater financial resources and some of which, unlike the Company, have vertically integrated their corn refining and other operations |
| Many of the Company’s products also compete with products made from raw materials other than corn |
| Fluctuation in prices of these competing products may affect prices of, and profits derived from, the Company’s products |
| Competition within markets is largely based on price, quality and product availability |
| Due to market volatility, the Company cannot assure that it can adequately pass potential increases in the cost of corn on to customers through product price increases or purchase quantities sufficient to sustain or increase its profitability |
| Corn purchasing costs, which include the price of the corn plus delivery cost, account for 40 percent to 65 percent of the Company’s product costs |
| The price and availability of corn is influenced by economic and industry conditions, including supply and demand factors such as crop disease and severe weather conditions such as drought, floods or frost that are difficult to anticipate and cannot be controlled by the Company |
| Volatility in the stock market fluctuations and in quarterly operating results and other factors could adversely affect the market price of the Company’s common stock |
| The market price for the common stock of the Company may be significantly affected by factors such as the announcement of new products or services by the Company or its competitors; technological innovation by the Company, its competitors or other vendors; quarterly variations in the Company’s operating results or the operating results of the Company’s competitors; general conditions in the Company’s and its customers’ markets; changes in the earnings estimates by analysts or reported results that vary materially from such estimates |
| In addition, the stock market has experienced significant price fluctuations that have affected the market prices of equity securities of many companies that have been unrelated to the operating performance of any individual company |
| Changes in consumer preferences and perceptions may lessen the demand for the Company’s products, which would reduce sales and harm the Company’s business |
| Food products are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends |
| The Company’s sales could also be affected by changing consumer tastes—for instance, if prevailing health or dietary preferences cause consumers to avoid food products containing sweetener products in favor of foods that are perceived as more healthy |
| 13 _________________________________________________________________ [50]Table of Contents The uncertainty of acceptance of products developed through biotechnology could effect the profitability of the Company |
| The commercial success of agricultural products developed through biotechnology depends in part on public acceptance of their development, cultivation, distribution and consumption |
| Public attitudes can be influenced by claims that genetically modified products are unsafe for consumption or that they pose unknown risks to the environment even if such claims are not based on scientific studies |
| These public attitudes can influence regulatory and legislative decisions about biotechnology even where they are approved |
| The sale of the Company’s products may in the future be delayed or impaired because of adverse public perception regarding the safety of the Company’s products and the potential effects of these products on animals, human health and the environment |
| Our profitability could be negatively impacted if we fail to maintain satisfactory labor relations |
| Approximately 32 percent of US and 60 percent of non-US employees are unionized |
| Strikes, lockouts or other work stoppages or slow downs involving the Company’s unionized employees could have a material adverse effect on the Company |
| The Company may not successfully identify and complete acquisitions or strategic alliances on favorable terms or achieve anticipated synergies relating to any acquisitions or alliances, and such acquisitions could result in unforeseen operating difficulties and expenditures and require significant management resources |
| The Company regularly reviews potential acquisitions of complementary businesses, technologies, services or products, as well as potential strategic alliances |
| The Company may be unable to find suitable acquisition candidates or appropriate partners with which to form partnerships or strategic alliances |
| Even if the Company identifies appropriate acquisition or alliance candidates, it may be unable to complete such acquisitions or alliances on favorable terms, if at all |
| In addition, the process of integrating an acquired business, technology, service or product into the Company’s existing business and operations may result in unforeseen operating difficulties and expenditures |
| Integration of an acquired company also may require significant management resources that otherwise would be available for ongoing development of the Company’s business |
| Moreover, the Company may not realize the anticipated benefits of any acquisition or strategic alliance, and such transactions may not generate anticipated financial results |
| Future acquisitions could also require issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to the other intangible assets, any of which could harm the Company’s business |
| No assurance can be given that the Company will continue to pay dividends |
| The payment of dividends is at the discretion of the Company’s Board of Directors and will be subject to the Company’s financial results and the availability of surplus funds to pay dividends |
| Anti-takeover provisions in the Company’s charter documents and under Delaware law may make it more difficult to acquire the Company |
| Certain provisions of the Company’s Amended and Restated Certificate of Incorporation (the “Corn Products Charter”) and the Company’s Amended By-laws (the “Corn Products By-Laws”) and of the Delaware General Corporation Law (the “DGCL”) may have the effect of delaying, deterring or preventing a change in control of the Company not approved by the Company’s Board |
| These provisions 14 _________________________________________________________________ [51]Table of Contents include (i) a classified Board of Directors, (ii) a requirement of the unanimous consent of all stockholders for action to be taken without a meeting, (iii) a requirement that special meetings of stockholders be called only by the Chairman of the Board or the Board of Directors, (iv) advance notice requirements for stockholder proposals and nominations, (v) limitations on the ability of stockholders to amend, alter or repeal the Corn Products Amended By-Laws and certain provisions of the Corn Products Charter, (vi) authorization for the Company’s Board to issue without stockholder approval preferred stock with such terms as the Board of Directors may determine and (vii) authorization for the Company’s Board to consider the interests of creditors, customers, employees and other constituencies of the Company and its subsidiaries and the effect upon communities in which the Company and its subsidiaries do business, in evaluating proposed corporate transactions |
| With certain exceptions, Section 203 of the DGCL (“Section 203”) imposes certain restrictions on mergers and other business combinations between the Company and any holder of 15 percent or more of the Company’s Common Stock |
| In addition, the Company has adopted a stockholder rights plan (the “Rights Plan”) |
| The Rights Plan is designed to protect stockholders in the event of an unsolicited offer and other takeover tactics, which, in the opinion of the Company’s Board, could impair the Company’s ability to represent stockholder interests |
| The provisions of the Rights Plan may render an unsolicited takeover of the Company more difficult or less likely to occur or might prevent such a takeover |
| These provisions of the Corn Products Charter and Corn Products By-laws, the DGCL and the Rights Plan could discourage potential acquisition proposals and could delay or prevent a change in control of the Company, although such proposals, if made, might be considered desirable by a majority of the Company’s stockholders |
| Such provisions could also make it more difficult for third parties to remove and replace the members of the Company’s Board |
| Moreover, these provisions could diminish the opportunities for a stockholder to participate in certain tender offers, including tender offers at prices above the then-current market value of the Company’s Common Stock, and may also inhibit increases in the market price of the Company’s Common Stock that could result from takeover attempts or speculation |
| The Company’s reliance on certain industries for a significant portion of sales could have a material adverse affect on the business |
| Approximately 19 percent of the Company’s 2005 worldwide sales were made to companies engaged in the processed foods industry and approximately 18 percent were made to companies in the soft drink industry |
| Additionally, approximately 11 percent of the Company’s 2005 worldwide sales were made to the animal feed market |
| If the Company’s processed foods customers, soft drink customers or animal feed customers were to substantially decrease their purchases, the business of the Company might be materially adversely affected |
| However, the Company believes there is no concentration of risk with any single customer or supplier, or small group of customers or suppliers, whose failure or non-performance would materially affect the Company’s results |
| An outbreak of a life threatening communicable disease could negatively impact the Company’s business |
| The outbreak of Severe Acute Respiratory Syndrome (“SARS”) previously affected the economies of certain countries where the Company’s products are manufactured and sold |
| If the economies of any countries where the company sells or manufactures its products is affected by a similar outbreak of SARS, the Avian Flu, or other life threatening communicable diseases, it could result in decreased sales and unfavorably impact the Company’s business |
| 15 _________________________________________________________________ [52]Table of Contents Cross-border disputes between countries in which the Company operates could result in duties, taxes or other costs that could adversely affect the Company’s results of operations |
| Due to cross-border disputes with the United States, the Company’s operations in Mexico and Canada could be adversely affected by actions taken by the governments of those two countries |
| In 2002, Mexico imposed a discriminatory tax on beverages sweetened with HFCS, which resulted in a substantial reduction of sales of HFCS in Mexico |
| However, sales of HFCS in Mexico have returned to historical levels and are continuing despite the continuation of the tax |
| In addition, Canada has recently imposed a significant duty on imported United States grain |
| If we are unable to maintain sales levels of high fructose corn syrup in Mexico and/or minimize the impact of the duties in Canada, the results of operations for these two countries could be negatively affected and the Company could be required to recognize a charge for impairment |
| The recognition of impairment charges on goodwill or long-lived assets would adversely impact the future financial position and results of operations of the Company |
| The Company performs an annual impairment assessment for goodwill and, as necessary, for long-lived assets |
| If the results of such assessments were to show that the fair value of the property, plant and equipment or goodwill were less than the carrying values, the Company would be required to recognize a charge for impairment of goodwill and/or long-lived assets and the amount of the impairment charge could be material |
| Unanticipated changes in our tax rates or exposure to additional income tax liabilities could impact the Company’s profitability |
| We are subject to income taxes in both the United States and various other foreign jurisdictions, and our domestic and international tax liabilities are subject to allocation of expenses among different jurisdictions |
| Our effective tax rates could be adversely affected by changes in the mix of earnings by jurisdiction, changes in tax laws or tax rates, changes in the valuation of deferred tax assets and liabilities, and material adjustments from tax audits |
| In particular, the carrying value of deferred tax assets, which are predominantly in the US, is dependent upon our ability to generate future taxable income in the US In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions and a material assessment by a governing tax authority could affect our profitability |
| Operating difficulties at the Company’s manufacturing plants could adversely affect our operating results |
| Corn refining is a capital intensive industry |
| The Company has 27 plants and has preventive maintenance and de-bottlenecking programs designed to maintain and improve grind capacity and facility reliability |
| This includes the shutdown and replacement of three current coal-fired boilers with one new coal-fired boiler at our Argo facility in Bedford Park, Illinois |
| See also Management’s Discussion and Analysis of Financial Condition and Results of Operations, section entitled “Liquidity and Capital Resources,” included herewith as part of Exhibit 13dtta1 for additional information relating to this capital project |
| If the Company encounters operating difficulties at a plant for an extended period of time or start up problems with the Argo boiler or other improvement projects, we may not be able to meet certain sales order commitments and could incur significantly higher operating expenses which could adversely affect our operating results |