Ingredion Incorporated — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Ingredion produces starches and sweeteners for food, beverage, industrial and other markets, operating through four geographic segments.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $1,482.7 million | $1,633.4 million | $2,839.8 million | $3,217.3 million |
| Gross profit | $295.9 million | $276.0 million | $545.7 million | $581.6 million |
| Gross margin | 20.0% | 16.9% | 19.2% | 18.1% |
| Operating income | $162.6 million | $140.1 million | $284.9 million | $315.2 million |
| Net income attributable to Ingredion | $102.6 million | $95.1 million | $175.2 million | $205.8 million |
| Diluted EPS | $1.35 | $1.20 | $2.31 | $2.61 |
Cash flow and balance sheet: First-half operating cash flow was $229 million, versus $112 million a year earlier; capital expenditures were $116 million. Cash and equivalents were $592 million at June 30, 2014, and total debt was approximately $1.77 billion, down from $1.81 billion at December 31, 2013. Current assets were $2.306 billion and current liabilities $739 million. The company reported no borrowings under its $1 billion revolving credit facility and approximately $464 million of unused foreign operating lines.
Changes versus prior comparable periods
- Q2 sales fell 9%, while operating income rose 16%, net income attributable to Ingredion increased 8%, and diluted EPS rose 13%. Sales declined mainly because lower corn costs reduced price/product mix and foreign currency translation was unfavorable; volume increased 4%.
- First-half sales fell 12%, operating income fell about 10%, net income attributable to Ingredion fell 15%, and diluted EPS declined to $2.31 from $2.61. Management attributed the earnings decline primarily to lower North American and South American operating income, especially in Q1.
- Lower raw-material costs and currency translation reduced cost of sales. Management said per-unit gross profit was generally maintained, contributing to higher gross-margin percentages.
- By segment, Q2 operating income increased in North America, Asia Pacific and EMEA, but declined in South America. First-half operating income increased in Asia Pacific and EMEA and declined in North America and South America.
Outlook, commentary and notable items
- Management expects South American conditions to remain challenging and anticipates full-year 2014 South American operating income will decline slightly from 2013. Inflation, currency devaluation and higher production costs in the Southern Cone constrained the ability to recover costs through pricing.
- Full-year 2014 capital expenditures are expected to be approximately $300 million. Management expects cash, operating cash flow and borrowing capacity to cover anticipated capital expenditures, dividends and other needs for the foreseeable future.
- On July 30, after quarter-end, Ingredion entered a $300 million accelerated share repurchase agreement and paid the amount on August 1. It initially received approximately 3.1 million shares; the final settlement may involve additional shares or cash and is expected in Q4 2014. The company said the agreement would be funded with cash and revolving-credit borrowings.
- Q2 included a $5 million pretax gain on sale of a non-consolidated affiliate and $4 million of product-liability claim costs. The sale consideration included an $11 million short-term receivable expected to be cash-settled in Q3.
- The Q2 2014 effective tax rate was 28.1%, compared with 21.9% a year earlier; Q2 2013 benefited from a $5 million discrete tax benefit. Ingredion said approximately $9 million of unrecognized tax benefits could be recognized in Q3 2014 if statutes of limitation lapse.
- Key exposures include corn and energy prices, foreign exchange—particularly in emerging markets—interest rates, South American economic and political conditions, and weather or operating disruptions. The filing reports no material change in market risks since year-end 2013.
Important facts for investors to verify
- Whether volume growth and per-unit profitability can continue to offset lower selling prices, currency movements and raw-material volatility.
- Progress in South America, including the effects of Argentine inflation, currency devaluation and pricing constraints.
- Cash flow, working-capital requirements and funding of the $300 million share repurchase, including its final settlement and effect on debt.
- Delivery of the approximately $300 million 2014 capital-spending plan and the expected segment earnings trends.
- Resolution and timing of the potential $9 million tax-benefit recognition and any material developments in product-liability claims or other contingencies.