Business context and reporting period
Ingredion Incorporated’s Form 10-Q covers the quarter and nine months ended September 30, 2013, compared with the same periods in 2012. The company produces starches and sweeteners for food, beverage, animal feed, paper, brewing and other industries, operating through four geographic segments.
Financial performance
All amounts are in millions of U.S. dollars except per-share data. Quarter and nine-month comparisons are year over year.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,611.7 | $1,679.0 | $4,829.0 | $4,888.2 |
| Gross profit | $258.8 | $313.2 | $840.5 | $904.3 |
| Gross margin | 16.1% | 18.7% | 17.4% | 18.5% |
| Operating income | $136.9 | $168.8 | $452.1 | $482.6 |
| Net income attributable to Ingredion | $86.3 | $112.7 | $292.2 | $316.0 |
| Diluted EPS | $1.10 | $1.45 | $3.71 | $4.06 |
- Q3 net sales declined 4%; a 4% volume reduction and 3% unfavorable currency impact outweighed 3% improved price/product mix. Nine-month sales declined 1%, as lower volume and unfavorable currency more than offset price/mix gains.
- Cost of sales was $1,352.9 in Q3, down 1%, and $3,988.5 for nine months, broadly flat. Gross margin contracted in both periods, principally because of weaker South American results.
- Operating income fell 19% in Q3 and 6% for nine months. Excluding prior-year restructuring, impairment and integration charges, management said operating income declined 24% and 12%, respectively.
- Operating cash flow was $362 for the first nine months, versus $563 in 2012. Capital expenditures were $202 in both nine-month periods.
- At September 30, cash and equivalents were $618; current assets were $2,307 and current liabilities $776. Total debt was approximately $1.77 billion, versus $1.80 billion at year-end 2012. The $1 billion revolving credit facility had no borrowings outstanding; the company also reported approximately $532 million of unused foreign operating lines.
Material changes and segment trends
- South America was the principal source of earnings pressure: Q3 operating income dropped 60% to $18.8, and nine-month operating income fell 43% to $79.5. Management cited weak demand, currency depreciation, and inability to recover higher corn, energy and labor costs through pricing.
- North America Q3 operating income decreased 6% to $96.6, while nine-month income increased 3% to $308.2, reflecting pricing and cost savings. Asia Pacific operating income declined 17% in Q3 and 2% for nine months. EMEA operating income fell 11% in Q3 and 6% for nine months.
- Weaker foreign currencies reduced operating income by approximately $5 in Q3 and $13 for the first nine months, according to management. Foreign currency translation also contributed to a $105 cumulative translation loss in other comprehensive income over the nine months.
- Operating cash flow fell mainly because of working-capital use, including higher receivables and lower accounts payable and accrued liabilities; lower inventory partly offset these effects.
Outlook, risks and unusual items
- Management expected South American operations to remain challenged for at least the rest of 2013 by high production costs, currency devaluation, pricing constraints and volume pressure.
- 2013 capital expenditures were expected to be approximately $300–$325. Management said cash, operating cash flow and borrowing capacity should fund anticipated capital expenditures, dividends and other needs for the foreseeable future.
- The board declared a quarterly dividend of $0.38 per share, paid October 25, 2013. The company repurchased 880,000 shares during the quarter under its existing program.
- 2013 tax rates benefited from discrete items, including tax benefits and favorable adjustments; absent specified items, management estimated effective tax rates of approximately 29% for both Q3 and the first nine months. The 2012 comparison included a $13 Korean deferred-tax valuation allowance reversal, along with restructuring, impairment and integration charges.
- Commodity, currency and interest-rate exposures are managed with derivatives. At quarter-end, AOCI included $50 of after-tax commodity-hedge losses; approximately $47 was expected to be reclassified to earnings over the next 12 months, with management expecting offsetting changes in underlying commodity costs.
- Other disclosed risks include economic and political conditions in South America and Europe, commodity and co-product price movements, customer demand and credit, foreign exchange, energy and raw-material availability, and operational or integration risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether South American pricing, volumes, currencies and input costs improve, and how that affects segment operating income.
- Whether working capital normalizes and operating cash flow recovers from the nine-month decline.
- Progress against the $300–$325 capital-spending outlook and the company’s ability to sustain dividends while funding investment.
- How corn, energy, currency movements and hedge reclassifications affect reported margins and earnings.
- The extent to which reported earnings comparisons reflect recurring operations versus prior-year charges and tax benefits.