Ingredion Incorporated — Q2 2017 Form 10-Q
Business context and reporting period. Ingredion produces starches and sweeteners and other food and industrial ingredients, operating across North America, South America, Asia Pacific, and EMEA. This unaudited quarterly report covers the three and six months ended June 30, 2017, compared with the same 2016 periods. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales, after shipping costs | $1.457 billion | $1.455 billion | $2.910 billion | $2.815 billion |
| Gross profit | $373 million | $355 million | $725 million | $694 million |
| Gross margin | 26% | 24% | 25% | 25% |
| Operating income | $211 million | $198 million | $406 million | $398 million |
| Net income attributable to Ingredion | $130 million | $117 million | $254 million | $248 million |
| Diluted earnings per share | $1.78 | $1.58 | $3.46 | $3.36 |
| Cash provided by operating activities | Not separately presented for the quarter | $302 million | $266 million |
Q2 sales were essentially flat; first-half sales increased 3%. Management attributed Q2 gross-margin improvement to operating efficiencies, lower raw-material costs, and comparison with prior-year North American maintenance. First-half gross margin was unchanged, as efficiencies and lower input costs were offset by higher Argentina costs.
Operating expenses were $157 million in Q2 and $306 million in the first half, up from $144 million and $282 million, respectively, mainly reflecting acquired businesses. Net financing costs rose to $20 million in Q2 from $19 million and to $41 million for the first half from $33 million. Effective tax rates were 30.4% for Q2 and 28.8% for the first half, versus 32.8% and 30.6% a year earlier.
Balance sheet, liquidity, and capital allocation
- At June 30, cash and cash equivalents were $441 million, short-term investments $13 million, current assets $2.208 billion, and current liabilities $874 million. Cash and equivalents declined $71 million from year-end 2016.
- Total debt was $1.954 billion, compared with $1.956 billion at December 31, 2016. Long-term debt was $1.838 billion and short-term borrowings were $116 million. The weighted-average interest rate on total debt was approximately 4.3% for the first half, versus 3.9% a year earlier.
- Debt includes $300 million of 1.8% senior notes due September 25, 2017; management stated it had the ability and intent to refinance them long-term. The $200 million of notes due April 2017 were repaid using the revolving credit facility; $186 million was outstanding under that facility at quarter-end. The company also reported approximately $440 million of unused foreign operating lines.
- First-half investing cash use was $165 million, including $144 million of capital expenditures and $13 million for the Sun Flour acquisition. Financing cash use was $218 million, including $128 million net share repurchases and $83 million of dividends paid.
- Ingredion repurchased approximately 1 million shares for $123 million in Q1. The board declared a $0.50-per-share quarterly dividend, paid July 25, 2017. Management expects available cash, operating cash flow, debt-market access, and credit capacity to cover foreseeable needs.
Material changes and segment trends
- North America: Q2 sales rose 1% to $905 million and operating income rose 13% to $181 million. First-half operating income increased 10% to $341 million, supported by improved margins, efficiencies, and TIC Gums-related volume.
- South America: Q2 sales fell 5% to $228 million and operating income fell 71% to $4 million. First-half operating income declined 44% to $18 million. Weak economic conditions, Argentina’s manufacturing interruption and associated costs, and unfavorable mix weighed on results.
- Asia Pacific: Q2 sales increased 4% to $187 million, while operating income fell 3% to $29 million, principally due to weaker price/product mix. First-half sales increased 5% and operating income increased 2% to $59 million.
- EMEA: Q2 sales declined 2% to $137 million while operating income remained $29 million. First-half sales were nearly flat and operating income increased 4% to $57 million.
Outlook, management commentary, and notable items
- Management expected full-year 2017 operating income and net income to grow versus 2016. It anticipated higher operating income in North America, Asia Pacific, and EMEA, but flat-to-lower results in South America due to weak economic activity and temporary Argentina costs.
- Planned 2017 capital expenditures were approximately $300 million to $325 million; $144 million had been spent in the first half.
- An Argentina workforce restructuring led to a labor strike and manufacturing interruption during Q2; a new agreement ended the strike on June 1. The company recorded $16 million of net restructuring charges in the first half, including $17 million of Argentina employee-related costs, partly offset by estimate revisions. A North American Finance Transformation initiative is expected to incur $8 million to $10 million of costs in the second half of 2017 and $1 million to $2 million in 2018.
- Q2 results included $4 million of acquired-inventory fair-value charges; first-half results included $9 million of such charges and $2 million of acquisition/integration costs. The Sun Flour acquisition in Thailand closed in March for $18 million; its reported results were not material to the period.
- Management anticipated a $13 million to $14 million reduction in tax expense in Q3 2017 from the U.S.-Canada tax settlement; it expected no impact on pre-tax income.
- Key disclosed risks include South American economic, political, and currency conditions; commodity, energy, freight, and foreign-exchange volatility; labor disputes; customer demand and pricing; and integration and realization of benefits from acquisitions. Brazilian labor claims had an aggregate reserve of approximately $5 million. Management did not expect known legal matters to be material, while cautioning outcomes could adversely affect results.
Important facts for investors to verify
- Whether full-year growth guidance was achieved, particularly against continued weakness and disruption in South America.
- Whether the $300 million September 2017 notes were refinanced as planned, and how borrowing costs and revolving-credit usage evolved.
- Whether projected capital spending and Finance Transformation costs remained within the stated ranges.
- Whether the anticipated Q3 tax benefit was recorded and whether acquisition-related inventory charges and integration costs continued.
- How cash generation, working capital, share repurchases, and dividends affected liquidity and total debt.