Ingredion Incorporated — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Ingredion produces starches and sweeteners for food, beverage, animal feed, paper, corrugating, brewing, and other industries, operating across four geographic segments.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1,357.2 million | $1,583.8 million | Down 14% |
| Gross profit | $249.8 million | $305.6 million | Down 18% |
| Gross margin | 18.4% | 19.3% | Down 0.9 percentage points |
| Operating income | $122.3 million | $175.1 million | Down 30% |
| Operating margin | 9.0% | 11.1% | Down 2.1 percentage points |
| Net income attributable to Ingredion | $72.6 million | $110.8 million | Down 34% |
| Diluted EPS | $0.96 | $1.41 | Down 32% |
| Cash from operations | $121 million | Cash used: $30 million | Improved $151 million |
Financing costs were $16.6 million versus $16.8 million. The effective tax rate was 28.8%, compared with 29.2%. Lower raw-material costs and weaker foreign currencies reduced both reported sales and costs; gross corn costs per ton fell approximately 28%. Operating expenses declined 2% to $132.4 million, but rose to 9.8% of sales from 8.6%.
Segment results
| Segment | Sales, Q1 2014 | Operating income, Q1 2014 | Year-over-year operating income |
|---|---|---|---|
| North America | $736.9 million, down 19% | $65.2 million | Down 39% |
| South America | $293.8 million, down 16% | $29.9 million | Down 31% |
| Asia Pacific | $185.4 million, down 5% | $25.7 million | Up 12% |
| EMEA | $141.1 million, up 9% | $21.1 million | Up 9% |
Balance sheet and liquidity
At March 31, 2014, cash and cash equivalents were $560 million, total assets were $5.301 billion, and total debt was approximately $1.78 billion, versus $1.81 billion at year-end 2013. Debt included $61 million of short-term borrowings and $1.718 billion of long-term debt. Current assets were $2.187 billion and current liabilities were $719 million. The company had no borrowings under its $1 billion revolving credit facility and reported approximately $410 million of unused foreign operating lines. About $376 million of cash was held outside the United States.
Q1 capital expenditures were $59 million. Cash declined $14 million to $560 million, after $121 million of operating cash flow, $59 million of investing outflow, and $68 million of financing outflow. Management expected 2014 capital expenditures of approximately $300 million and said cash, operating cash flow, and borrowing capacity should cover anticipated needs for the foreseeable future. The board declared a $0.42-per-share quarterly dividend, paid April 25, 2014.
Material changes and management commentary
- Sales fell 14%, reflecting an 8% decline in price/product mix, principally from lower raw-material costs, and 6% unfavorable currency translation; total volume was flat. North American volume declines offset growth elsewhere.
- North America earnings were pressured by severe winter weather, higher energy, transportation, and production costs.
- South America remained challenged, particularly Argentina, by currency devaluation, higher corn, energy, and labor costs, pricing constraints, and weaker demand. Management expected Southern Cone pressures to continue for the foreseeable future.
- Asia Pacific and EMEA operating income increased, supported by volume growth, lower corn costs in South Korea, and improved selling prices, respectively.
- Operating cash flow improved substantially from the prior-year period, primarily because of a smaller working-capital investment, partly offset by lower net income.
Outlook, risks, and unusual items
- Management provided no specific earnings or revenue guidance in this filing; it forecast approximately $300 million of full-year 2014 capital expenditures.
- Management said approximately $10 million of unrecognized tax benefits could be recognized in Q3 2014 if statutes of limitation lapse, favorably affecting tax expense.
- Market risks include corn and natural-gas prices, foreign exchange, interest rates, and co-product prices. The company uses derivatives to hedge exposures; approximately $7 million of net commodity-hedge gains were expected to be reclassified into earnings over the next 12 months, with an expected offset from underlying commodity costs.
- Other disclosed risks include continued currency and economic volatility in South America, commodity and energy costs, weather, demand and pricing, raw-material availability, and operating and competitive pressures. The company used Argentina’s official exchange rate for remeasurement; a less favorable parallel exchange market existed.
- Q1 comprehensive income attributable to Ingredion was $80 million, versus $69 million. The improvement reflected cash-flow hedge activity that more than offset lower net income and a less favorable currency translation adjustment.
Important facts for investors to verify
- Whether North American weather-related cost pressures ease and margins recover.
- Whether Argentina and the Southern Cone continue to face devaluation, pricing limitations, cost inflation, and volume weakness.
- Progress toward the approximately $300 million 2014 capital-spending plan and the expected liquidity position.
- Whether the potential $10 million tax benefit is recognized in Q3, and the timing and earnings effects of hedge reclassifications.
- Underlying segment volumes, pricing, and currency effects, which drove materially different reported sales and earnings trends.