Business context and reporting period
Corn Products International, Inc. (CPI) filed this unaudited Form 10-Q for the quarter ended September 30, 2011. CPI produces starches, sweeteners and other corn-derived ingredients and reports four geographic segments: North America, South America, Asia Pacific and EMEA. The filing identifies the registrant as Corn Products International, Inc.; investors should verify how that relates to the requested company name, Ingredion Inc.
Comparisons are affected by the October 1, 2010 acquisition of National Starch, whose results are included from that date forward. CPI paid $1.369 billion, funded principally with borrowings.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,627.7 million | $1,019.5 million | $4,671.8 million | $2,959.8 million |
| Gross profit | $275.9 million | $171.6 million | $846.0 million | $478.2 million |
| Gross margin | 17.0% | 16.8% | 18.1% | 16.2% |
| Operating income | $142.4 million | $88.6 million | $504.7 million | $236.9 million |
| Net income attributable to CPI | $87.7 million | $36.9 million | $320.7 million | $117.2 million |
| Diluted EPS | $1.12 | $0.48 | $4.10 | $1.53 |
- Operating cash flow for the first nine months was $147 million, down from $325 million. Working-capital investment—particularly higher inventories, receivables and commodity-hedging margin accounts—more than offset earnings growth.
- Capital expenditures were $158 million for the nine months. Management expected full-year 2011 capital expenditures of approximately $220–$250 million.
- At September 30, cash was $279 million; total debt was approximately $1.87 billion, versus $1.77 billion at December 31, 2010. Balance-sheet long-term debt was $1.751 billion, with $122 million of short-term borrowings and current maturities. Weighted-average interest rate on total indebtedness was approximately 4.9% for the nine-month period.
- Current assets were $1.914 billion and current liabilities were $834 million. CPI had $324 million drawn on its $1 billion revolving facility and approximately $458 million of unused foreign operating lines. The revolver maturity was extended to June 6, 2014.
Material changes versus prior periods
- Net sales rose 60% in Q3 and 58% for the first nine months. Management attributed growth to National Starch, higher selling prices/product mix, and favorable currency translation. On a comparable basis excluding the acquisition, organic volume was mixed across regions.
- Management said gross-margin improvement reflected acquired specialty-starch operations and better selling prices. Gross corn costs per ton increased approximately 49% in Q3 and 40% year to date, putting pressure on certain operations.
- Reported nine-month operating income included a $58.4 million NAFTA award. Excluding the award and specified integration/restructuring items, management reported operating-income growth of 70% year over year; excluding specified unusual items, it reported net-income growth of 67%.
- Financing costs were $12.7 million in Q3 versus $30.2 million, but $58.3 million year to date versus $41.7 million. The prior-year periods included a $20 million bridge-loan financing charge; excluding it, 2011 financing costs were higher, primarily due to acquisition-related borrowings.
- Comprehensive income attributable to CPI was a loss of $155 million in Q3 (versus income of $120 million) and income of $150 million for the nine months (versus $177 million), principally reflecting adverse currency translation and cash-flow hedge movements.
Outlook, risks and unusual items
- Management expected improved full-year 2011 sales and earnings compared with 2010 and said operating cash flow and borrowing availability should fund anticipated capital expenditures, dividends and other plans for the foreseeable future.
- A North American manufacturing optimization plan was expected to finish by September 30, 2012. CPI recorded $4 million of charges in Q3 and $6 million year to date, and expected to record approximately $4 million per quarter until completion.
- The $58.4 million NAFTA award was paid in January 2011 and recognized in other income for the nine months; the award related to Mexico’s former tax on beverages sweetened with HFCS.
- Key exposures include corn and natural-gas prices, co-product pricing, foreign exchange, interest rates, economic conditions, customer demand and credit, raw-material availability, and integration and synergy execution for National Starch. CPI uses derivatives to hedge certain commodity, currency and interest-rate exposures; hedging does not cover all risks.
- A sugar-industry complaint alleging misleading HFCS statements sought injunctive relief and unspecified damages. On October 21, 2011, the court dismissed claims against CPI and other defendants with leave to amend. Management reported no material change in market risk and no material change in internal control over financial reporting; disclosure controls were deemed effective.
Important facts for investors to verify
- Confirm the registrant/name relationship: this filing is for Corn Products International, Inc., not under the name Ingredion Inc.
- Assess earnings quality by separating National Starch contributions, the $58.4 million NAFTA award, integration costs and restructuring charges from recurring performance.
- Track working-capital needs and operating cash conversion, given the decline in nine-month operating cash flow despite substantially higher net income.
- Review debt maturities, revolver availability and interest-rate exposure, including the swap converting the $350 million 2015 notes to a variable rate.
- Monitor corn-cost pass-through, regional volume trends, acquisition integration, the optimization plan and the status of the HFCS-related litigation.