Ingredion Incorporated — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise. Ingredion makes starches and sweeteners and operates through four geographic segments.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,436.7 | $1,460.3 | $4,215.8 | $4,300.1 |
| Gross profit | $329.9 | $297.6 | $929.2 | $843.3 |
| Operating income | $175.0 | $178.1 | $487.0 | $463.1 |
| Net income attributable to Ingredion | $107.9 | $118.6 | $298.2 | $293.8 |
| Diluted EPS | $1.48 | $1.60 | $4.09 | $3.89 |
- Gross margin improved to 23% in Q3 and 22% for the first nine months, from 20% in both comparable 2014 periods. Management cited lower corn costs and generally maintained gross-profit dollars per unit.
- Q3 sales declined about 2%; unfavorable currency translation of 11% outweighed 9% volume growth, of which 2% was organic. Nine-month sales declined about 2%; 8% unfavorable currency and a 1% price/mix decline more than offset 7% volume growth, including 1% organic growth.
- Q3 operating income fell about 2%, but would have grown 8% excluding impairment, restructuring, acquisition/integration, and acquired-inventory fair-value charges. Nine-month operating income rose about 5%, or 14% excluding those charges.
- Q3 net income and diluted EPS declined year over year; nine-month net income rose about 2% and diluted EPS about 5%. Lower weighted-average shares, partly reflecting repurchases, supported per-share results.
- Cash provided by operations was $481, versus $462 for the first nine months of 2014. Capital expenditures were $193; management expected approximately $300 for full-year 2015.
- At September 30, cash and cash equivalents were $722, short-term investments $9, and total debt approximately $2.27 billion, versus $1.83 billion at December 31, 2014. The debt increase primarily funded acquisitions. Current assets were $2.29 billion and current liabilities $670 million.
- Financing costs declined to $44 for the first nine months from $49. The weighted-average interest rate on total debt was approximately 3.4%, versus 4.2% a year earlier.
Segments and material developments
- North America: Q3 sales increased 9% to $880 million and operating income rose 18% to $133 million, with acquisitions contributing and organic earnings benefiting from lower costs. Nine-month operating income increased 25% to $362 million, including $7 million of business-interruption insurance recoveries.
- South America: Q3 sales decreased 17% to $256 million, largely from currency translation, while operating income rose 4% to $28 million. Nine-month sales fell 16% and operating income was $73 million versus $74 million; management cited difficult conditions, particularly in Brazil.
- Asia Pacific: Q3 sales fell 15% to $174 million and operating income rose 2% to $28 million. Nine-month sales declined 7%, while operating income increased 1% to $81 million.
- EMEA: Q3 sales fell 11% to $126 million and operating income was $22 million, approximately flat. Nine-month sales declined 10% and operating income fell 3% to $67 million.
- Ingredion acquired Penford on March 11 for $332 million, including $93 million of debt extinguished, and Kerr Concentrates on August 3 for approximately $102 million. Both acquisitions were funded with borrowings and their results are included from their acquisition dates. Purchase-price allocations remained subject to finalization; Kerr’s was preliminary.
- The company agreed to sell its Port Colborne, Ontario, manufacturing assets for approximately $30 million, with closing expected in Q4 2015. It expected a pre-tax gain of approximately $10 million and recorded a $2 million restructuring charge; possible 2016 pension-related charges were not expected to be significant.
- Ingredion announced closures of two Brazil plants, with production transfers and consolidation planned for 2016. It recorded $12 million of Q3 charges and forecast annual savings of approximately $6–$8 million beginning in 2017.
Liquidity, outlook, risks and contingencies
- Management said cash, operating cash flow, debt-market access, and credit facilities should provide sufficient liquidity for the foreseeable future. Approximately $700 million of $731 million in cash and short-term investments was held outside the United States.
- A new 18-month, $350 million term loan facility was entered into in July; proceeds repaid revolving-credit borrowings. The $1 billion revolving facility had $169 million drawn at quarter-end. Ingredion intended to refinance $350 million of notes maturing November 1, 2015 using the revolver.
- The term loan includes leverage and interest-coverage covenants; an event of default could accelerate obligations and terminate the facility. Total debt also includes fixed-rate notes and local borrowings; interest-rate swaps convert some note exposure to variable rates.
- For full-year 2015, management expected North America to drive operating-income and bottom-line growth; modest improvement in Asia Pacific; lower operating income in EMEA; and South America approximately in line with 2014, with Andean strength offsetting weakness in Brazil and the Southern Cone. No specific full-year EPS guidance is stated in the supplied filing text.
- Foreign-exchange translation materially pressured sales and operating income. Other risks cited include weak regional economies, commodity and energy prices, customer demand and pricing, integration and synergy delivery for Penford and Kerr, and foreign-exchange, interest-rate, and market volatility. The company hedges certain commodity, currency, and interest-rate exposures; hedging cannot eliminate all risks.
- The Q3 effective tax rate was 31.8%, versus 26.1%; the nine-month rate was 31.2%, versus 27.5%. Management attributed the higher rates principally to the Mexican peso’s decline, partly offset by tax items; it estimated rates of approximately 29% absent specified items.
- A lawsuit involving high-fructose corn syrup claims remained pending; summary-judgment motions were denied and trial was scheduled to begin November 3, 2015. Ingredion said it believed the complaint lacked merit and would defend the case. The filing text does not provide a clear quantified exposure or reserve for this matter.
- Management reported disclosure controls were effective. Penford and Kerr were excluded from the quarter-end internal-control effectiveness evaluation while their operations, processes, and controls were being integrated.
Most important facts for investors to verify
- Whether the acquired businesses deliver expected growth, integration progress, and synergies, and how final purchase-price allocations affect reported results.
- Whether Brazil restructuring achieves the stated $6–$8 million annual savings from 2017, and whether closure costs remain limited.
- Execution and proceeds of the Port Colborne sale, including the anticipated gain and any subsequent pension costs.
- Refinancing of the November 2015 note maturity, covenant compliance, and debt and interest-cost trends following acquisition financing.
- Whether currency movements, particularly in South America and Mexico, continue to offset operating improvements and affect tax expense.
- Developments in the pending litigation and any material change in exposure or disclosure.