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Equity | 12 Months Ended
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Dec. 31, 2018
Equity |
Equity | NOTE 12 – Equity Preferred stock: The Company has authorized 25 million shares of $0.01 par value preferred stock, none of which were issued or outstanding at December 31, 2018 and 2017. Treasury stock: On October 22, 2018, the Board of Directors authorized a new stock repurchase program permitting the Company to purchase up to an additional 8 million of its outstanding common shares from November 5, 2018 through December 31, 2023. On December 12, 2014, the Board of Directors authorized a stock repurchase program permitting the Company to purchase up to 5 million of its outstanding common shares from January 1, 2015, through December 12, 2019. The parameters of the Company’s stock repurchase program are not established solely with reference to the dilutive impact of shares issued under the Company’s stock incentive plan. However, the Company expects that, over time, share repurchases will offset the dilutive impact of shares issued under the stock incentive plan. On November 5, 2018, the Company entered into a Variable Timing Accelerated Share Repurchase (“ASR”) program with JPMorgan (“JPM”). Under the ASR program, the Company paid $455 million on November 5, 2018 and acquired 4 million shares of its common stock having an approximate value of $423 million. At the end of the program, the Company and JPM will settle any difference between the initial price and average daily volume-weighted average price (“VWAP”) less the agreed upon discount during the term of the agreement. On February 5, 2019 the Company was notified that JPM finalized the ASR with a resulting VWAP of $98.04 that was less than initially paid. The Company elected to settle the difference in cash resulting in a $63 million of the upfront payment returned to the Company on February 6, 2019 and lowering the total cost of repurchasing the 4.0 million shares of common stock to $392 million. In 2018, the Company repurchased 5.8 million common shares in open market transactions at a cost of $657 million. In 2017, the Company repurchased 1.0 million common shares in open market transactions at a cost of $123 million. Set forth below is a reconciliation of common stock share activity for the years ended December 31, 2018, 2017, and 2016:
(Shares of common stock, in thousands) |  | Issued |  | Held in Treasury |  | Outstanding |
Balance at December 31, 2015 |  | 77,811 |  | 6,195 |  | 71,616 |
Issuance of restricted stock units as compensation |  | — |  | (94) |  | 94 |
Performance shares and other share-based awards |  | — |  | (70) |  | 70 |
Stock options exercised |  | — |  | (636) |  | 636 |
Purchase/acquisition of treasury stock |  | — |  | 2 |  | (2) |
Balance at December 31, 2016 |  | 77,811 |  | 5,397 |  | 72,414 |
Issuance of restricted stock units as compensation |  | — |  | (103) |  | 103 |
Performance shares and other share-based awards |  | — |  | (75) |  | 75 |
Stock options exercised |  | — |  | (443) |  | 443 |
Purchase/acquisition of treasury stock |  | — |  | 1,039 |  | (1,039) |
Balance at December 31, 2017 |  | 77,811 |  | 5,815 |  | 71,996 |
Issuance of restricted stock units as compensation |  | — |  | (100) |  | 100 |
Performance shares and other share-based awards |  | — |  | (68) |  | 68 |
Stock options exercised |  | — |  | (209) |  | 209 |
Purchase/acquisition of treasury stock |  | — |  | 5,847 |  | (5,847) |
Balance at December 31, 2018 |  | 77,811 |  | 11,285 |  | 66,526 |
Share-based payments: The following table summarizes the components of the Company’s share-based compensation expense for the last three years:
(in millions) |  | 2018 |  | 2017 |  | 2016 |
Stock options: |  |  |  |  |  |  |  |  |  |
Pre-tax compensation expense |  | $ | 5 |  | $ | 7 |  | $ | 9 |
Income tax benefit |  |  | (1) |  |  | (2) |  |  | (3) |
Stock option expense, net of income taxes |  |  | 4 |  |  | 5 |  |  | 6 |
RSUs: |  |  |  |  |  |  |  |  |  |
Pre-tax compensation expense |  |  | 12 |  |  | 13 |  |  | 12 |
Income tax benefit |  |  | (2) |  |  | (4) |  |  | (5) |
RSUs, net of income taxes |  |  | 10 |  |  | 9 |  |  | 7 |
Performance shares and other share-based awards: |  |  |  |  |  |  |  |  |  |
Pre-tax compensation expense |  |  | 4 |  |  | 6 |  |  | 7 |
Income tax benefit |  |  | — |  |  | (2) |  |  | (3) |
Performance shares and other share-based compensation expense, net of income taxes |  |  | 4 |  |  | 4 |  |  | 4 |
Total share-based compensation: |  |  |  |  |  |  |  |  |  |
Pre-tax compensation expense |  |  | 21 |  |  | 26 |  |  | 28 |
Income tax benefit |  |  | (3) |  |  | (8) |  |  | (11) |
Total share-based compensation expense, net of income taxes |  | $ | 18 |  | $ | 18 |  | $ | 17 |
The Company has a stock incentive plan (“SIP”) administered by the compensation committee of its Board of Directors that provides for the granting of stock options, restricted stock, restricted stock units, and other share-based awards to certain key employees. A maximum of 8 million shares were originally authorized for awards under the SIP. As of December 31, 2018, 3.3 million shares were available for future grants under the SIP. Shares covered by awards that expire, terminate or lapse will again be available for the grant of awards under the SIP. Stock Options: Under the Company’s SIP, stock options are granted at exercise prices that equal the market value of the underlying common stock on the date of grant. The options have a 10-year term and are exercisable upon vesting, which occurs over a three-year period at the anniversary dates of the date of grant. Compensation expense is generally recognized on a straight-line basis for all awards over the employee’s vesting period or over a one-year required service period for certain retirement eligible executive level employees. The Company estimates a forfeiture rate at the time of grant and updates the estimate throughout the vesting of the stock options within the amount of compensation costs recognized in each period. The Company granted non-qualified options to purchase 215 thousand shares and 278 thousand shares for the years ended December 31, 2018 and 2017, respectively. The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
|  | For the Year Ended December 31,
|  | 2018 |  | 2017 |  | 2016
Expected life (in years) |  | 5.5 |  |  | 5.5 |  |  | 5.5 |
Risk-free interest rate |  | 2.5 | % |  | 1.9 | % |  | 1.4 | %
Expected volatility |  | 19.8 | % |  | 22.5 | % |  | 23.4 | %
Expected dividend yield |  | 1.8 | % |  | 1.7 | % |  | 1.8 | %
The expected life of options represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the grant date for the period corresponding to the expected life of the options. Expected volatility is based on historical volatilities of the Company’s common stock. Dividend yields are based on current dividend payments. A summary of stock option transactions for the year follows:
|  | Number of Options (in thousands) |  | Weighted Average Exercise Price per Share |  | Average Remaining Contractual Term (Years) |  | Aggregate Intrinsic Value (in millions) |
Outstanding as of December 31, 2017 |  | 2,095 |  | $ | 71.81 |  | 5.87 |  | $ | 142 |
Granted |  | 215 |  |  | 133.61 |  |  |  |  |  |
Exercised |  | (209) |  |  | 48.50 |  |  |  |  |  |
Cancelled |  | (22) |  |  | 99.81 |  |  |  |  |  |
Outstanding as of December 31, 2018 |  | 2,079 |  | $ | 80.25 |  | 5.51 |  | $ | 42 |
Exercisable as of December 31, 2018 |  | 1,599 |  | $ | 67.85 |  | 4.68 |  | $ | 42 |
For the years ended December 31, 2018, 2017, and 2016, cash received from the exercise of stock options was $10 million, $20 million, and $29 million, respectively. As of December 31, 2018, the unrecognized compensation cost related to non-vested stock options totaled $3 million, which is expected to be amortized over the weighted-average period of approximately 1.8 years. Additional information pertaining to stock option activity is as follows:
|  | Year Ended December 31,
(dollars in millions, except per share) |  | 2018 |  | 2017 |  | 2016
Weighted average grant date fair value of stock options granted (per share) |  | $ | 24.01 |  | $ | 23.90 |  | $ | 18.73
Total intrinsic value of stock options exercised |  |  | 15 |  |  | 35 |  |  | 46
Restricted Stock Units: The Company has granted restricted stock units (“RSUs”) to certain key employees. The RSUs are subject to cliff vesting, generally after three years provided the employee remains in the service of the Company. Compensation expense is generally recognized on a straight-line basis for all awards over the employee’s vesting period or over a one-year required service period for certain retirement eligible executive level employees. The Company estimates a forfeiture rate at the time of grant and updates the estimate throughout the vesting of the RSUs within the amount of compensation costs recognized in each period. The fair value of the RSUs is determined based upon the number of shares granted and the quoted market price of the Company’s common stock at the date of the grant. The following table summarizes RSU activity for the year:
|  |  |  | Weighted
|  | Number of |  | Average
|  | Restricted |  | Fair Value
(shares in thousands) |  | Shares |  | per Share
Non-vested at December 31, 2017 |  | 387 |  | $ | 100.13
Granted |  | 114 |  |  | 128.76
Vested |  | (137) |  |  | 84.05
Cancelled |  | (20) |  |  | 114.98
Non-vested at December 31, 2018 |  | 344 |  | $ | 115.06
The total fair value of RSUs that vested in 2018, 2017, and 2016 was $15 million, $18 million, and $15 million, respectively. At December 31, 2018, the total remaining unrecognized compensation cost related to RSUs was $13 million which will be amortized on a weighted-average basis over approximately 1.8 years. Recognized compensation cost related to unvested RSUs is included in share-based payments subject to redemption in the Consolidated Balance Sheets and totaled $26 million and $25 million at December 31, 2018 and 2017, respectively. Performance Shares: The Company has a long-term incentive plan for senior management in the form of performance shares. The ultimate payments for performance shares awarded and vested will be based solely on the Company’s stock performance as compared to the stock performance of its peer group. The number of shares that ultimately vest can range from zero to 200 percent of the awarded grant depending on the Company’s stock performance as compared to the stock performance of the peer group. The share award vesting will be calculated at the end of the three-year period and are subject to approval by management and the Compensation Committee. Compensation expense is based on the fair value of the performance shares at the grant date, established using a Monte Carlo simulation model. The total compensation expense for these awards is amortized over a three-year graded vesting schedule. The Company awarded 27 thousand, 38 thousand, and 44 thousand performance shares in 2018, 2017, and 2016, respectively. The weighted average fair value of the shares granted during 2018, 2017, and 2016 was $141.91, $114.08, and $131.34, respectively. The 2015 performance share award vested in February 2018, achieving a 200 percent pay out of the grant, or 92 thousand total vested shares. As of December 31, 2018, the performance awards granted in 2018, 2017, and 2016 are estimated to pay out at zero percent, respectively. There were 16 thousand shares cancelled during the year ended December 31, 2018. As of December 31, 2018, the unrecognized compensation cost relating to these plans was $3 million, which will be amortized over the remaining requisite service periods of 1.7 years. Recognized compensation cost related to these unvested awards is included in share-based payments subject to redemption in the Consolidated Balance Sheets and totaled $10 million and $11 million at December 31, 2018 and 2017, respectively. Other share-based awards under the SIP: Under the compensation agreement with the Board of Directors, $110,000 of a director’s annual retainer and 50 percent of the additional retainers paid to the Lead Director and the Chairmen of committees of the Board of Directors are awarded in shares of common stock or restricted units based on each director’s elections to receive his or her compensation or a portion thereof in the form of restricted units. These restricted units vest immediately, and the director is allowed to either receive these shares immediately or defer them. Deferred shares cannot be transferred until a date not less than six months after the director’s termination of service from the board at which time the restricted units will be settled by delivering shares of common stock. The compensation expense relating to this plan included in the Consolidated Statements of Income was approximately $1 million in 2018, 2017, and 2016. At December 31, 2018, there were approximately 191 thousand restricted units outstanding under this plan at a carrying value of approximately $11 million. Accumulated Other Comprehensive Loss: A summary of accumulated other comprehensive income (loss) for the years ended December 31, 2016, 2017 and 2018 is presented below:
(in millions) |  | Cumulative Translation Adjustment |  | Deferred (Loss) Gain on Hedging Activities |  | Pension and Postretirement Adjustment |  | Unrealized (Loss) Gain on Investment |  | Accumulated Other Comprehensive Loss |
Balance, December 31, 2015 |  | $ | (1,025) |  | $ | (29) |  | $ | (47) |  | $ | (1) |  | $ | (1,102) |
Other comprehensive income (loss) before reclassification adjustments |  |  | 17 |  |  | (17) |  |  | (14) |  |  | 1 |  |  | (13) |
Amount reclassified from accumulated OCI |  |  | — |  |  | 49 |  |  | 1 |  |  | — |  |  | 50 |
Tax (provision) benefit |  |  | — |  |  | (10) |  |  | 4 |  |  | — |  |  | (6) |
Net other comprehensive income (loss) |  |  | 17 |  |  | 22 |  |  | (9) |  |  | 1 |  |  | 31 |
Balance, December 31, 2016 |  |  | (1,008) |  |  | (7) |  |  | (56) |  |  | — |  |  | (1,071) |
Other comprehensive income (loss) before reclassification adjustments |  |  | 57 |  |  | (16) |  |  | 8 |  |  | 3 |  |  | 52 |
Amount reclassified from accumulated OCI |  |  | — |  |  | 6 |  |  | (2) |  |  | — |  |  | 4 |
Tax benefit (provision) |  |  | — |  |  | 4 |  |  | (1) |  |  | (1) |  |  | 2 |
Net other comprehensive income (loss) |  |  | 57 |  |  | (6) |  |  | 5 |  |  | 2 |  |  | 58 |
Balance, December 31, 2017 |  |  | (951) |  |  | (13) |  |  | (51) |  |  | 2 |  |  | (1,013) |
Other comprehensive (loss) income before reclassification adjustments |  |  | (129) |  |  | 8 |  |  | (20) |  |  | — |  |  | (141) |
Amount reclassified from accumulated OCI |  |  | — |  |  | 6 |  |  | — |  |  | — |  |  | 6 |
Tax (provision) benefit |  |  | — |  |  | (4) |  |  | 5 |  |  | — |  |  | 1 |
Net other comprehensive (loss) income |  |  | (129) |  |  | 10 |  |  | (15) |  |  | — |  |  | (134) |
Adoption of ASU 2016-01* |  |  | — |  |  | — |  |  | — |  |  | (2) |  |  | (2) |
Adoption of ASU 2018-02* |  |  | — |  |  | (2) |  |  | (3) |  |  | — |  |  | (5) |
Other |  |  | — |  |  | (2) |  |  | (3) |  |  | (2) |  |  | (7) |
Balance, December 31, 2018 |  | $ | (1,080) |  | $ | (5) |  | $ | (69) |  | $ | — |  | $ | (1,154) |
* See Note 2 for further discussion on adoption of these standards. The following table provides detail pertaining to reclassifications from AOCI into net income for the periods presented:
|  |  |  | Affected Line Item in
|  | Amount Reclassified from AOCI |  | Consolidated
(in millions) |  | 2018 |  | 2017 |  | 2016 |  | Statements of Income
(Losses) gains on cash flow hedges: |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | (6) |  | $ | (5) |  | $ | (45) |  | Cost of sales
Foreign currency contracts |  |  | 1 |  |  | 1 |  |  | (2) |  | Net sales/Cost of sales
Interest rate contracts |  |  | (1) |  |  | (2) |  |  | (2) |  | Financing costs, net
Gains related to pension and other postretirement obligations |  |  | - |  |  | 2 |  |  | (1) |  | (a)
Total before-tax reclassifications |  |  | (6) |  |  | (4) |  |  | (50) |  |
Tax benefit |  |  | 2 |  |  | 1 |  |  | 16 |  |
Total after-tax reclassifications |  | $ | (4) |  | $ | (3) |  | $ | (34) |  |
| (a) |  | This component is included in the computation of net periodic benefit cost and affects both cost of sales and operating expenses on the Consolidated Statements of Income.
The following table provides the computation of basic and diluted earnings per common share (“EPS”) for the periods presented.
|  |  | 2018 |  |  | 2017 |  |  | 2016 |
|  |  | Net Income |  |  | Weighted |  |  | Per |  |  | Net Income |  |  | Weighted |  |  | Per |  |  | Net Income |  |  | Weighted |  |  | Per |
|  |  | Available |  |  | Average |  |  | Share |  |  | Available |  |  | Average |  |  | Share |  |  | Available |  |  | Average |  |  | Share |
(in millions, except per share amounts) |  |  | to Ingredion |  |  | Shares |  |  | Amount |  |  | to Ingredion |  |  | Shares |  |  | Amount |  |  | to Ingredion |  |  | Shares |  |  | Amount |
Basic EPS |  | $ | 443 |  |  | 70.9 |  | $ | 6.25 |  | $ | 519 |  |  | 72.0 |  | $ | 7.21 |  | $ | 485 |  |  | 72.3 |  | $ | 6.70 |
Effect of Dilutive Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Incremental shares from assumed exercise of dilutive stock options and vesting of dilutive RSUs and other awards |  |  |  |  |  | 0.9 |  |  |  |  |  |  |  |  | 1.5 |  |  |  |  |  |  |  |  | 1.8 |  |  |  |
Diluted EPS |  | $ | 443 |  |  | 71.8 |  | $ | 6.17 |  | $ | 519 |  |  | 73.5 |  | $ | 7.06 |  | $ | 485 |  |  | 74.1 |  | $ | 6.55 |

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