Ingredion Incorporated — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results; amounts in U.S. dollars. Ingredion produces starches, sweeteners and other ingredients and reports four geographic segments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1.489bn | $1.437bn | $4.304bn | $4.216bn |
| Gross profit | $369m | $330m | $1.063bn | $929m |
| Operating income | $221m | $175m | $619m | $487m |
| Net income attributable to Ingredion | $143m | $108m | $391m | $298m |
| Diluted EPS | $1.93 | $1.48 | $5.29 | $4.09 |
- Sales increased 4% in Q3 and 2% for the nine-month period. Q3 price/product mix improved 6%, partly offset by 1% lower volume and 1% unfavorable currency translation. Nine-month price/product mix improved 6%; organic volume declined approximately 2%.
- Gross margin was 25% in both 2016 periods, versus 23% in Q3 2015 and 22% in the first nine months of 2015. Management attributed improvement mainly to North America, with gains also in Asia Pacific and EMEA.
- Q3 operating income rose 27%; nine-month operating income rose 27%. Excluding restructuring, impairment and acquisition-related charges, management said operating income grew 16% in Q3 and 20% year to date; diluted EPS growth on that basis was 20% and 22%, respectively.
- Nine-month operating cash flow was $542m, up from $481m. Capital expenditures were $197m. Cash and cash equivalents were $751m at September 30, versus $434m at December 31, 2015.
- Total debt was $1.892bn, compared with $1.84bn at year-end 2015. Long-term debt was $1.859bn and short-term borrowings $33m. The weighted-average interest rate on debt was approximately 3.9% for the first nine months, versus 3.4% in 2015.
- Current assets were $2.381bn and current liabilities $796m. The company reported no borrowings on its prior $1bn revolving facility at quarter-end and approximately $406m of unused foreign operating lines of credit. Management said cash, operating cash flow, debt-market access and credit capacity should meet foreseeable needs.
Segment trends and changes
- North America: Nine-month sales rose 5% to $2.634bn and operating income increased 31% to $474m, driven by improved product mix and operating efficiencies; acquired businesses contributed approximately 3 percentage points of the operating-income increase.
- South America: Nine-month sales fell 4% to $731m and operating income fell 19% to $59m. Price/mix gains were outweighed by weaker currencies, lower volumes, higher local costs and difficult economic conditions, especially in the Southern Cone.
- Asia Pacific: Nine-month sales declined 3% to $534m, while operating income increased 7% to $87m, supported by volume and cost control.
- EMEA: Nine-month sales increased 3% to $405m and operating income increased 21% to $80m, supported by volume growth and lower raw-material and energy costs.
- Quarterly dividend increased 11% to $0.50 per share. In September, Ingredion issued $500m of 3.2% senior notes due 2026, using proceeds in part to repay $350m of term debt and $52m of revolving borrowings. A new five-year $1bn revolving credit agreement was entered into in October.
Outlook, risks and unusual items
- Management expected full-year 2016 operating income and net income to grow versus 2015. It expected North America operating income to increase, South America operating income to decline, and EMEA and Asia Pacific operating income to grow. Planned full-year capital expenditures were approximately $300m.
- Management anticipated continued economic and currency-related challenges in South America and was evaluating strategic options; some actions could result in future asset impairment charges. It expected additional IT-outsourcing restructuring costs of approximately $2m in Q4 2016 and $2m in the first half of 2017.
- In October 2016, the U.S. and Canada reached a tentative agreement on contested treaty issues for tax years 2004–2013. Ingredion had not recorded the potential settlement; it expected $23m–$27m of additional tax expense in Q4 2016 and a further $7m–$13m reserve for uncertain tax positions for 2014–2016.
- Other risks identified include commodity and energy-price volatility, foreign-exchange movements, South American economic conditions, customer demand and pricing, raw-material availability, competitive pressure, and execution and integration of acquisitions. Commodity and foreign-currency exposures are managed with derivatives; commodity hedge losses in accumulated other comprehensive loss were expected to be reclassified to earnings over the following 12 months and, management expected, offset by underlying commodity-cost changes.
- The company disclosed EPA Notices of Violation concerning sulfur dioxide and particulate emissions and pollution-control equipment at its Argo plant. No formal legal action had been commenced as of the filing.
- Results included restructuring charges of $2m in Q3 and $15m for the nine months. The filing also notes early adoption of share-based-payment accounting, which affected tax expense, EPS and cash-flow presentation.
Investor verification priorities
- Confirm the outcome, timing and final tax cost of the U.S.–Canada settlement and related uncertain-tax-position reserve.
- Track South America operating performance, foreign-exchange effects and any resulting restructuring or impairment charges.
- Assess whether North American margin gains and volume trends persist, and how acquisition contributions compare with organic performance.
- Review debt refinancing, interest costs, covenant compliance and liquidity following the 2026 note issuance and replacement revolving facility.
- Monitor the Argo EPA matter, planned IT-outsourcing costs, and completion and financial impact of the pending China and Thailand acquisitions.