Ingredion Incorporated — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. Ingredion produces starches and sweeteners and other food and industrial ingredients across four regional segments.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $1.455B | $1.449B | $2.815B | $2.779B |
| Gross profit | $355M | $319M | $694M | $599M |
| Operating income | $198M | $173M | $398M | $312M |
| Net income attributable to Ingredion | $117M | $107M | $248M | $190M |
| Diluted EPS | $1.58 | $1.47 | $3.36 | $2.62 |
Gross margin was 24% for Q2 and 25% for the first half, versus 22% in both year-ago periods. Management attributed the improvement mainly to stronger North American margins. Reported sales rose slightly: Q2 price/product mix gains were largely offset by foreign-exchange headwinds and lower volume; first-half mix and volume gains were partly offset by currency.
Cash flow and liquidity: First-half operating cash flow was $266M, versus $248M; capital expenditures were $125M. Cash and cash equivalents were $487M at June 30, compared with $434M at year-end; short-term investments were $20M. Current assets were $2.138B and current liabilities $685M.
Debt: Total debt was approximately $1.83B, versus $1.84B at December 31, 2015; the six-month weighted-average interest rate was approximately 3.9%, up from 3.4%. The company had $83M drawn on its $1B revolving credit facility and approximately $400M of unused foreign operating lines. A $350M term loan matures in January 2017 and $200M of 6% notes mature in April 2017; management said it has the ability and intent to refinance both on a long-term basis. The filing reports $497M of cash and short-term investments held outside the U.S.
Material changes and segment performance
- North America: Q2 sales increased 3% to $895M and operating income rose 26% to $160M. First-half operating income increased 35% to $309M, reflecting improved price/mix and efficiencies, as well as contributions from acquisitions.
- South America: Q2 sales declined 4% to $240M and operating income fell 31% to $14M. First-half sales fell 10% to $455M and operating income fell 29% to $32M, amid weak currencies, lower volume, higher local costs, and difficult economic conditions.
- Asia Pacific: Q2 sales declined 6% to $180M, while operating income rose 6% to $30M. First-half operating income increased 7% to $58M; lower raw-material and energy costs and cost control helped offset weaker pricing and currency.
- EMEA: Q2 sales rose 2% to $140M and operating income increased 27% to $29M. First-half operating income rose 23% to $55M, aided by volume growth and lower input costs.
Q2 and first-half 2016 operating income included $13M of restructuring charges; first-half results also included $1M of acquisition/integration costs. The corresponding prior-year periods included Penford-related restructuring, integration and acquired-inventory charges. Excluding restructuring and acquisition-related charges, management said operating income grew 17% in Q2 and 22% in the first half, while diluted EPS grew 13% and 24%, respectively.
Outlook, commentary and risks
- Management expected full-year 2016 operating income and net income to grow versus 2015. It anticipated North American operating-income growth from improved mix and margins; South America was expected to decline; and EMEA and Asia Pacific were expected to grow despite currency headwinds.
- Management forecast approximately $300M of 2016 capital expenditures and said cash, operating cash flow, debt-market access and credit capacity should fund anticipated needs for the foreseeable future.
- Additional IT-outsourcing costs of approximately $6M were expected in the second half of 2016. Brazil plant consolidations were expected to be completed by year-end.
- A proposed acquisition of Shandong Huanong Specialty Corn Development in China remained subject to government approvals and customary closing conditions; management did not expect a material financial impact.
- Risks highlighted include South American economic, political and currency conditions; commodity and co-product price volatility; foreign-exchange and interest-rate movements; energy, freight and raw-material availability and costs; customer demand and competitive pressure; and execution of acquisitions, cost programs and capital projects. The company uses derivatives to manage certain commodity, currency and interest-rate exposures.
- Ingredion early adopted stock-compensation accounting guidance in Q2. The adoption added tax benefits of $3M for Q2 and $6M for the first half to reported results; it also affected cash-flow classification. The filing states that full-year interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether reported earnings growth persists after restructuring, acquisition-related items and the stock-compensation tax benefit.
- Progress in South America, including volume, local costs, currency effects and plant-network optimization.
- Execution and costs of the IT-outsourcing program and Brazil plant consolidation.
- Refinancing plans and terms for the $350M term loan and $200M notes due in 2017, and the company’s debt and interest-cost trajectory.
- Status, approvals, purchase terms and subsequent financial impact of the proposed China acquisition.
- Working-capital needs, capital spending against the approximately $300M full-year plan, and the accessibility of cash held outside the U.S.