Ingredion Incorporated — Form 10-Q Summary
Reporting period: Unaudited quarter and nine months ended September 30, 2012. The company changed its name from Corn Products International, Inc. to Ingredion Incorporated in May 2012. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,679 | $1,628 | $4,888 | $4,672 |
| Gross profit | $313 | $276 | $904 | $846 |
| Gross margin | 18.7% | 17.0% | 18.5% | 18.1% |
| Operating income | $169 | $142 | $483 | $505 |
| Net income attributable to Ingredion | $113 | $88 | $316 | $321 |
| Diluted EPS | $1.45 | $1.12 | $4.06 | $4.10 |
| Cash provided by operations | Not stated separately | Not stated separately | $563 | $147 |
Q3 net sales increased 3%, with 5% favorable price/product mix and 3% volume growth more than offsetting 5% unfavorable currency translation. Management said the quarter set company records for third-quarter sales, operating income, net income and diluted EPS. Higher selling prices and volume were key drivers, helping cover higher raw-material costs and currency headwinds.
For the first nine months, reported operating income and attributable net income declined year over year. Comparisons were affected by the $58.4 million NAFTA award recorded in 2011. Excluding the award and specified restructuring, impairment and integration items, management reported nine-month operating income growth of 9% and net income growth of 14%; these are company-adjusted comparisons, not reported GAAP results.
Segments and operating trends
- North America: Q3 sales rose 10% to $977 million and operating income rose 33% to $102.5 million, supported by price/mix and volume, including stronger soft-drink and brewing demand. Nine-month sales increased 12% and operating income 21%.
- South America: Q3 sales fell 12% to $363 million, and operating income fell 2% to $46.7 million. Weak Brazilian demand and currency translation weighed on results. Nine-month sales decreased 8% and operating income 3%; Argentina transportation and labor disruptions also affected volumes.
- Asia Pacific: Q3 sales increased 11% to $215 million and operating income increased 43% to $28.6 million, reflecting volume and price/mix gains. Nine-month sales rose 6% and operating income 16%.
- EMEA: Q3 sales declined 6% to $124 million and operating income declined 9% to $19.5 million. Nine-month sales and operating income fell 6% and 12%, respectively, amid currency weakness, difficult European conditions and energy shortages in Pakistan.
Q3 cost of sales rose 1%; management cited higher corn costs and volume growth. Gross corn costs increased approximately 3% in Q3 and 6% for the nine-month period. Q3 operating expenses increased to $137 million from $131 million, primarily due to compensation costs.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $513 million, short-term investments $19 million, and total current assets $2.22 billion versus current liabilities of $781 million.
- Total debt was approximately $1.77 billion, down from $1.95 billion at December 31, 2011. The company reported a 4.5% weighted-average borrowing rate for the first nine months, versus 4.9% a year earlier.
- Nine-month operating cash flow was $563 million, versus $147 million in 2011; management attributed the improvement mainly to working-capital changes. Capital expenditures were $202 million. Full-year 2012 capital expenditures were expected to be approximately $300 million.
- In September, Ingredion issued $300 million of 1.80% senior notes due 2017; net proceeds were used in part to repay $205 million of revolving-facility borrowings. No borrowings were outstanding under the prior $1 billion revolver at quarter-end. A new five-year $1 billion revolver was entered into on October 22, 2012; the company may increase it by up to $250 million subject to conditions. It also reported approximately $533 million of unused foreign operating lines.
- The board raised the quarterly dividend 30%, from $0.20 to $0.26 per share; payment was made October 25, 2012. Management expected operating cash flow and borrowing availability to fund anticipated capital spending, dividends and other needs for the foreseeable future. Approximately $392 million of cash was held outside the United States.
Outlook, unusual items and risks
- Management anticipated a strong full year 2012 and said the company was positioned well for Q4, without providing specific earnings or sales guidance.
- Kenya restructuring and closure costs included charges recorded in 2012. The company expected approximately $9 million of additional Q4 charges, primarily from recognizing cumulative currency translation adjustments; if the assets could not be sold, dismantling could incur up to $3 million of additional charges in the first half of 2013.
- Other Q3 items included a $4 million impairment of the company’s Chinese GFEMS investment and a $1 million charge for impaired assets in Colombia. North American manufacturing optimization also generated charges, including accelerated depreciation; the plan was completed in October 2012.
- The reported 2012 tax rate was 25.5% for both Q3 and the first nine months. Tax benefits included a $13 million reversal of a Korean deferred-tax valuation allowance in Q2, approximately $4 million of released uncertain tax benefits, and approximately $3 million of Kenya-related tax benefits in Q3. Excluding specified items, management estimated tax rates of approximately 29% for Q3 and 31% year to date.
- Key disclosed exposures include corn and natural-gas prices, co-product prices, foreign exchange and interest rates; global economic conditions and customer demand; energy availability in Pakistan; raw-material supply, weather, labor disputes and integration of acquired businesses. The company uses derivatives to hedge some commodity, currency and interest-rate exposures; it cannot hedge co-product price risk.
- A lawsuit brought by sugar companies alleging false or misleading HFCS-related statements remained pending. Ingredion said it would vigorously defend the case. The company and other defendants also filed a counterclaim seeking injunctive relief and unspecified damages; plaintiffs moved to dismiss it in October 2012. The filing does not quantify potential exposure.
Important facts for investors to verify
- Reconcile reported nine-month earnings declines with the prior-year NAFTA award and management’s adjusted comparisons; assess the assumptions behind those adjustments.
- Track the expected Kenya charges, asset-sale prospects and possible 2013 dismantling costs, along with other restructuring and impairment charges.
- Monitor regional demand and currency trends, particularly South America and EMEA, and whether North American growth and pricing continue to offset higher input costs.
- Review debt maturities, revolver covenant compliance, cash held abroad, planned capital spending and the sustainability of the higher dividend.
- Assess commodity-hedge gains expected to enter earnings and their offset against underlying input costs, as well as the unresolved HFCS-related litigation.