Ingredion Incorporated — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Ingredion produces starches, sweeteners, specialty ingredients and related products for food, beverage, industrial and other markets, operating through North America, South America, Asia Pacific and EMEA.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $5.704 billion | $5.621 billion | Up 1% |
| Gross profit | $1.402 billion | $1.242 billion | Up 13% |
| Gross margin | 25% | 22% | Up 3 percentage points |
| Operating income | $808 million | $660 million | Up 22% |
| Net income attributable to Ingredion | $485 million | $402 million | Up 21% |
| Diluted EPS | $6.55 | $5.51 | Up 19% |
| Cash provided by operations | $771 million | $686 million | Up $85 million |
Net sales benefited from 5% improvement in price/product mix, offset by 4% unfavorable currency translation; total volume was flat, while organic volume declined about 2%, primarily reflecting the Port Colborne plant sale. Cost of sales decreased 2%, while gross corn cost per ton increased about 3%. Management said improved North American pricing/mix and operating efficiency were the principal earnings drivers.
Fourth quarter: Net sales were $1.399 billion versus $1.405 billion a year earlier; gross profit was $339 million versus $313 million. Net income attributable to Ingredion was $94 million versus $104 million, and diluted EPS was $1.26 versus $1.42. The 2016 quarter included a $27 million income-tax settlement charge.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $512 million, short-term investments $4 million, working capital $1.274 billion, and total assets $5.782 billion.
- Total debt was $1.956 billion, including $106 million of short-term borrowings and $1.850 billion of long-term debt. Net debt was $1.440 billion; management’s non-GAAP net-debt-to-adjusted-EBITDA ratio was 1.4, compared with 1.6 in 2015. Net debt to capitalization was 34.0%, down from 37.4%.
- Operating cash flow was $771 million; capital expenditures were $284 million and acquisition payments, net of acquired cash, were $407 million. Dividends paid, including non-controlling interests, were $141 million.
- The company issued $500 million of 3.2% senior notes due 2026 and repaid a $350 million term loan and $52 million of revolving-credit borrowings. It entered a new $1 billion revolving facility, with no year-end borrowings, and reported compliance with its covenants. It also had approximately $443 million of unused foreign operating lines.
- $500 million of long-term debt was scheduled to mature in 2017; management stated it had the ability and intent to refinance the notes on a long-term basis before maturity. The weighted-average interest rate on total debt was approximately 4.0%.
Material changes and notable items
- North America operating income increased 27% to $610 million, driven mainly by price/mix and operating efficiencies. South America operating income declined 12% to $89 million amid difficult economic conditions, lower volume and currency weakness. Asia Pacific rose 4% to $111 million; EMEA rose 14% to $106 million.
- Ingredion acquired TIC Gums on December 29, 2016 for $395 million, net of cash acquired, expanding texture systems and clean-label formulation capabilities. It also acquired Shandong Huanong in China for $12 million. TIC Gums purchase accounting remained preliminary at year-end.
- Reported 2016 results included $19 million of restructuring charges, $3 million of acquisition/integration costs and a $27 million income-tax matter charge. The effective tax rate was 33.1%, versus 31.2%; excluding identified items, management reported adjusted rates of approximately 29.4% and 31.8%, respectively.
- Capital expenditures are expected to be approximately $300–$325 million in 2017. The quarterly dividend was increased 11% to $0.50 per share; future dividends remain subject to board discretion.
Outlook, risks and contingencies
Management expected operating income and net income to grow in 2017, without providing numerical guidance. It forecast growth in North America from mix and margins; expected South America to remain challenging but operating income to improve from 2016; and anticipated growth in Asia Pacific and EMEA, supported by specialty ingredients and cost control, despite currency headwinds. Management cited available cash, operating cash flow, debt-market access and credit capacity as sufficient for anticipated needs for the foreseeable future.
Key risks include commodity and energy price volatility and supply availability; inability to pass costs through to customers; currency movements and challenging South American conditions; competition and shifting consumer preferences, including reduced demand for HFCS; manufacturing reliability, product safety and regulatory compliance; and integration and expected benefits of acquisitions. Management closely monitored Brazil goodwill of $26 million and certain manufacturing assets in Brazil and Argentina for impairment risk. A potential Argentina plant remediation program was under discussion with regulators; management did not expect the ultimate cost to be material. Brazilian labor claims had approximately $5 million reserved. The filing says known legal matters were not expected to be material, while noting outcomes are uncertain.
Other items to note: approximately $2.7 billion of foreign earnings were treated as permanently reinvested; about $399 million of year-end cash and short-term investments were held outside the United States. The auditor and management concluded internal control over financial reporting was effective, but TIC Gums and Shandong, acquired late in 2016, were excluded from the control assessment. The auditor’s opinion on the financial statements was unqualified.
Investor verification priorities
- Confirm the sustainability of 2016’s margin and earnings improvement, particularly North American price/mix and efficiency gains.
- Track South America volumes, currency effects, cost optimization and whether monitored assets or goodwill require impairment.
- Review TIC Gums integration, final purchase accounting, realized synergies and the returns on the $395 million acquisition.
- Assess refinancing of the $500 million of 2017 maturities and the effect of interest rates, given the company’s floating-rate exposure.
- Follow resolution and cash/tax consequences of the U.S.–Canada tax settlement, unrecognized tax benefits and foreign earnings reinvestment position.