Ingredion Incorporated — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results; dollars in millions except per-share data. Ingredion produces starches and sweeteners and reports four geographic segments.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,460.3 | $1,611.7 | $4,300.1 | $4,829.0 |
| Gross profit | $297.6 | $258.8 | $843.3 | $840.5 |
| Operating income | $178.1 | $136.9 | $463.1 | $452.1 |
| Net income attributable to Ingredion | $118.6 | $86.3 | $293.8 | $292.2 |
| Diluted EPS | $1.60 | $1.10 | $3.89 | $3.71 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $462 | $362 |
Q3 gross margin was 20.4% versus 16.1%; operating margin was approximately 12.2% versus 8.5%. For the first nine months, gross margin was 19.6% versus 17.4%, and operating margin was approximately 10.8% versus 9.4%. Management attributed improved gross margins principally to lower corn costs while maintaining per-unit gross profit dollars.
- Q3 net sales fell 9% year over year: price/product mix declined 9%, while volume rose 2% and currency translation reduced sales by 2%. For the first nine months, sales declined 11%, reflecting a 9% price/product mix decline and 4% unfavorable currency, partly offset by 2% volume growth.
- Q3 operating income rose 30% and Ingredion-attributable net income rose 37%. Nine-month operating income increased modestly; net income was nearly flat. Share repurchases contributed to EPS growth in both periods.
- Q3 financing costs declined to $15.1 from $17.9; nine-month costs were $49.0 versus $50.9. The filing cites lower foreign-currency transaction losses as a key factor.
Cash, debt and liquidity
- At September 30, cash and equivalents were $565, current assets $2,216 and current liabilities $763. Total debt was approximately $1.92 billion, versus $1.81 billion at December 31, 2013; long-term debt was $1.888 billion and short-term borrowings $29 million.
- Nine-month operating cash flow of $462 million exceeded the prior-year $362 million, primarily due to lower working-capital cash outflows. Investing activities used $177 million, including $187 million of net capital expenditures; financing activities used $270 million.
- Cash declined by $9 million during the first nine months. Approximately $540 million of the $565 million cash balance was held outside the United States. The company reported $175 million drawn on its $1 billion revolving credit agreement and approximately $499 million of unused foreign operating lines.
- Management said cash, expected operating cash flow and available credit were sufficient for foreseeable needs. It expected 2014 capital expenditures to be slightly below $300 million. The declared quarterly dividend was $0.42 per share, paid October 27, 2014.
Changes, outlook and notable items
- Regional Q3 operating income improved year over year in all four segments. North America benefited from volume and cost savings; South America from improved selling prices; Asia Pacific from volume and lower South Korean corn costs; and EMEA from volume, cost reductions and manufacturing efficiencies. For the first nine months, North America and South America operating income declined, while Asia Pacific and EMEA increased.
- Management expected full-year 2014 South America operating income to decline slightly from 2013, citing difficult economic conditions. It described improvement as the year progressed, but noted inflation, currency devaluation and weak Brazilian demand. Unfavorable currency translation reduced nine-month operating income by approximately $17 million overall.
- On October 14, 2014, Ingredion agreed to acquire Penford for $19 cash per share; estimated consideration was $340 million, including assumed debt. The proposed acquisition was subject to shareholder, regulatory and other closing conditions, and was expected to be funded with cash and revolving-credit borrowings. Penford reported fiscal 2013 sales of $467 million.
- Ingredion completed an accelerated share repurchase funded with $300 million, receiving approximately 3.2 million shares initially. The agreement could result in further share or cash settlement; based on prices through September 30, the bank would deliver approximately 0.7 million additional shares. The reduced share count boosted reported EPS.
- Q3 included a 5.3-percentage-point favorable tax-rate effect from reversal of unrecognized tax benefits and a 4.5-point unfavorable audit adjustment related to a pre-acquisition tax matter. The latter was indemnified by Akzo; the $7 million tax expense was offset by $7 million of other income, with no net-income effect. Nine-month other income also included a $5 million gain on sale of an affiliate and $4 million of product-liability costs.
- Q3 comprehensive loss attributable to Ingredion was $39 million, versus $83 million of income a year earlier, primarily due to a $127 million unfavorable year-over-year currency-translation variance. Accumulated other comprehensive loss was $719 million at September 30, including substantial currency-translation and hedge losses. Approximately $52 million of after-tax commodity-hedge losses was expected to be reclassified into earnings over the next 12 months; management expected offsetting commodity-cost changes.
- Risks identified include volatile commodity and energy prices, foreign exchange and interest rates, South American economic and political conditions, customer demand and pricing, supply and operating disruptions, and the ability to complete and integrate the Penford acquisition. The filing stated there were no material changes in market risk and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower corn costs and improved margins persist as selling prices and input costs change.
- South America’s full-year operating-income trajectory and exposure to currency, inflation and weak demand.
- Penford transaction approvals, final funding needs, closing terms and integration prospects.
- Final settlement of the $300 million accelerated share repurchase and its effect on shares outstanding and liquidity.
- Timing and earnings impact of hedge-loss reclassifications, tax items and foreign-currency movements.