Ingredion Incorporated — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Ingredion produces starches, sweeteners, and other food and industrial ingredients, with operations reported across North America, South America, Asia Pacific, and EMEA.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Net sales | $1.360 billion | $1.330 billion |
| Gross profit / gross margin | $339 million / 25% | $281 million / 21% |
| Operating income | $200 million | $140 million |
| Net income attributable to Ingredion | $127 million | $84 million |
| Diluted EPS | $1.73 | $1.15 |
| Operating cash flow | $96 million | $69 million |
| Capital expenditures | $59 million | $58 million |
| Cash and short-term investments | $497 million at March 31, 2016 | $440 million at December 31, 2015 |
| Total debt | Approximately $1.89 billion | $1.84 billion at December 31, 2015 |
Financing costs were $14 million, unchanged year over year. The effective tax rate was 30.1%, versus 31.7% (the prior-year rate included an unfavorable Mexico peso impact). Current assets were $2.068 billion and current liabilities $693 million at quarter-end. Cash provided by financing activities was $9 million; cash increased $43 million to $477 million.
Changes versus the prior comparable period
- Sales rose 2%, reflecting 6% improvement in price/product mix and 4% volume growth, largely from the Penford and Kerr acquisitions, partly offset by 8% unfavorable currency translation. Organic volume declined about 2%, including the effect of the Port Colborne plant sale.
- Operating income increased 44% as reported. Q1 2016 included $1 million of acquisition/integration costs; Q1 2015 included $10 million restructuring, $4 million acquisition/integration costs, and $3 million acquired-inventory fair-value charges. Management said operating income would have grown 28% excluding those charges.
- North America sales increased 11% to $841 million and operating income rose 46% to $149 million. South America sales fell 17% to $215 million and operating income declined 27% to $18 million. Asia Pacific sales declined 10% to $169 million while operating income rose 9% to $28 million. EMEA sales rose 3% to $135 million and operating income rose 19% to $26 million.
- Currency translation negatively affected operating income by approximately $14 million overall. Comprehensive income attributable to Ingredion was $162 million, compared with a $59 million comprehensive loss in Q1 2015, primarily reflecting the year-over-year currency-translation swing and higher net income.
Liquidity, debt, outlook, and risks
- Management expects full-year 2016 operating income and net income to grow versus 2015. It expects North America income to increase on improved mix and margins; South America to remain difficult, with a modest income decline; and Asia Pacific and EMEA to grow modestly. Planned 2016 capital expenditures are approximately $300 million.
- Debt includes a $350 million term loan due January 2017, which is classified as long-term because the company says it has the ability and intent to refinance it on a long-term basis. A $1 billion revolving credit agreement matures in October 2017; $156 million was drawn at March 31. The company also reported approximately $403 million of unused foreign operating lines and expects available cash, operating cash flow, and borrowing capacity to cover foreseeable needs.
- Approximately $464 million of cash and short-term investments was held outside the United States. Management says it does not expect to need to repatriate foreign funds for ordinary domestic liquidity needs.
- Key exposures include foreign exchange, corn and energy prices, co-product prices, market demand, and economic and political conditions—particularly in South America. In Argentina, the company uses the official exchange rate for remeasurement while a less favorable parallel market exists.
- Commodity cash-flow hedges had $27 million of after-tax losses in accumulated other comprehensive loss, expected to be reclassified to earnings over the next 12 months; the company expects these losses to be offset by underlying commodity-cost changes. Foreign-currency forward contracts had a net fair-value liability of $18 million.
- The planned Brazil manufacturing consolidation is expected to be completed by year-end 2016. No restructuring charge was recorded in Q1 2016; the severance accrual was $8 million and is expected to be paid within 12 months.
- A potential $1 million tax benefit may be recognized in Q2 or Q3 2016 if statutes of limitation lapse. A proposed acquisition of Shandong Huanong Specialty Corn Development in China remained subject to government approval and customary closing conditions; management did not expect a material financial impact.
- Management reported effective disclosure controls. It was still evaluating and integrating Kerr’s operations, processes, and internal controls.
Important facts for investors to verify
- Whether full-year earnings growth expectations are achieved, especially amid South America’s economic and currency pressures.
- How much of North America’s earnings improvement reflects sustainable organic mix, pricing, and efficiencies versus acquired businesses.
- Progress on refinancing the $350 million term loan before its January 2017 maturity and on the revolving credit facility before its October 2017 maturity.
- Actual capital spending versus the approximately $300 million plan, and the effect of working-capital needs on operating cash flow.
- Brazil consolidation execution and costs, the status of the proposed China acquisition, and any changes in currency, commodity, or hedge exposures.