Ingredion Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited results; comparisons are with Q1 2012 unless otherwise stated. Ingredion produces starches and sweeteners through four geographic segments.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $1,583.8 million | $1,574.2 million | Up 1% |
| Gross profit | $305.6 million | $295.9 million | Up 3% |
| Operating income | $175.1 million | $161.0 million | Up 9% |
| Net income attributable to Ingredion | $110.8 million | $94.2 million | Up 18% |
| Diluted EPS | $1.41 | $1.21 | Up 17% |
| Operating cash flow | $(30) million | $29 million | Down $59 million |
| Capital expenditures | $66 million | $59 million | Up $7 million |
Gross margin was approximately 19% (management-reported, consistent with the prior year). Operating expenses were $135.5 million versus $136.2 million; financing costs declined to $16.8 million from $19.5 million. The effective tax rate was 29.2%, versus 32.4%.
At March 31, cash and cash equivalents were $526 million, down from $609 million at year-end 2012. Total debt was approximately $1.81 billion, versus $1.80 billion at year-end; cash less total debt was approximately $1.28 billion net debt. Current assets were $2.388 billion and current liabilities $879 million. The company had no borrowings under its $1 billion revolving credit facility and approximately $479 million of unused foreign operating lines.
Material changes and operating drivers
- Sales increased 1% as a 5% improvement in price/product mix more than offset a 2% volume decline and a 2% adverse currency impact.
- Operating income rose, particularly in North America and Asia Pacific. Excluding Q1 2012 integration and restructuring charges, Q1 2013 operating income increased 5%, and net income and diluted EPS increased 13% and 12%, respectively.
- North America sales increased 2% and operating income increased 8%. South America sales fell 5% and operating income fell 5%, reflecting currency weakness and lower volumes amid weak economic conditions and brewery-industry excess capacity. Asia Pacific operating income increased 13%; EMEA operating income increased 2%.
- Gross corn costs per ton increased approximately 7%. Higher raw-material costs were offset by lower volumes, currency effects and cost savings. Q1 2012 included $3.8 million of restructuring charges and $2.4 million of integration costs; the manufacturing optimization plan was completed in October 2012.
- Comprehensive income attributable to Ingredion fell to $69 million from $106 million, principally because of unfavorable currency translation, despite higher net income.
Cash flow, outlook and notable items
- Operating cash use reflected working-capital investment: increases in receivables and inventories and reductions in accounts payable and accrued liabilities. Management expected these first-quarter cash uses to reverse during the rest of 2013.
- Management anticipated approximately $700 million of operating cash flow and capital expenditures of approximately $350 million to $400 million for full-year 2013. It also anticipated 2013 net-sales and EPS growth, without providing numeric growth targets.
- Management expected cash, operating cash flow and available borrowing capacity to fund planned capital spending, dividends and other needs for the foreseeable future.
- The board declared a quarterly dividend of $0.38 per share, a 46% increase from $0.26; it was paid April 25, 2013.
- Approximately $1.5 million of tax benefit from retroactively extended U.S. tax provisions reduced the Q1 effective tax rate by 90 basis points. A pending Canadian tax-court determination could produce an approximately $4.5 million discrete tax benefit if favorable; timing and outcome were uncertain.
- Commodity, currency and interest-rate exposures are managed with derivatives. AOCI included $28 million of after-tax commodity-hedging losses; approximately $25 million was expected to be reclassified into earnings over the next 12 months and management expected offsets from underlying commodity costs.
Risks and contingencies
Risks identified include economic weakness, including in Europe and Argentina; demand, pricing and customer-credit conditions; corn, energy, co-product and freight costs; foreign-exchange and interest-rate movements; supply, weather and operating disruptions; competition and changing consumption preferences; and integration and project-execution risks. Management reported no material change in market-risk disclosures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether expected working-capital reversals support the approximately $700 million full-year operating cash-flow outlook.
- Progress against the $350 million–$400 million capital-spending plan and the effect on cash and debt.
- Whether sales and EPS growth expectations are achieved, especially given South America’s weak demand and currency exposure.
- The outcome and timing of the Canadian tax matter and its potential $4.5 million tax benefit.
- How commodity-hedge losses are reclassified and whether they are offset by underlying input-cost changes.