Ingredion Incorporated — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; comparisons are primarily with 2013. The filing also reports fourth-quarter results. Amounts are in U.S. dollars.
Business context
Ingredion manufactures starches, sweeteners, specialty ingredients and related co-products for food, beverage, animal nutrition, paper and corrugating, brewing, and other markets. It operates four geographic segments. North America generated 55% of 2014 sales, South America 21%, Asia Pacific 14%, and EMEA 10%. Specialty ingredients represented approximately 24% of sales, up from 21% in 2013.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $5.668 billion | $6.328 billion |
| Gross profit / margin | $1.115 billion / 20% | $1.131 billion / 18% |
| Operating income | $581 million | $613 million |
| Net income attributable to Ingredion | $355 million | $396 million |
| Diluted earnings per share | $4.74 | $5.05 |
| Cash provided by operations | $731 million | $619 million |
| Capital expenditures | $276 million | $298 million |
| Cash and short-term investments | $614 million | $574 million in cash; no short-term investments reported |
| Total debt | $1.827 billion | $1.810 billion |
| Working capital | $1.423 billion | $1.394 billion |
Operating cash flow less capital expenditures was approximately $455 million in 2014. The company reported a 30.2% effective tax rate, compared with 26.3% in 2013. Its non-GAAP net-debt-to-adjusted-EBITDA ratio was 1.5x, unchanged year over year; net debt to capitalization was 33.5%, up from 31.7%. Quarterly dividends declared rose to $0.42 per share from $0.38 in the first three quarters of 2013 and $0.42 in the fourth quarter of 2013.
Changes versus 2013
- Sales fell 10%, reflecting an 8% decline in price/product mix—primarily lower corn costs passed through in pricing—and 4% unfavorable currency translation; 2% volume growth partly offset those effects.
- Gross profit declined modestly, but gross margin increased to 20% from 18%, as lower input costs and generally maintained per-unit gross profit supported the percentage margin.
- Operating income decreased 5% as reported. Excluding a $33 million goodwill impairment and $2 million of Penford acquisition costs, operating income was essentially flat.
- Reported net income fell 10% and diluted EPS declined 6%. Excluding the impairment and acquisition costs, management said net income would have declined 2% while diluted EPS would have increased 3%, aided by share repurchases.
- Segment operating income declined in North America to $375 million (down 6%) and South America to $108 million (down 7%); it grew in Asia Pacific to $103 million (up 6%) and EMEA to $95 million (up 28%).
- Operating cash flow increased 18%, mainly due to working-capital movements, including higher payables and accrued liabilities and lower commodity-hedging margin accounts.
Fourth-quarter 2014 net sales were $1.368 billion and net income attributable to Ingredion was $61 million, or $0.83 diluted EPS. Fourth-quarter 2013 sales were $1.499 billion and net income was $104 million, or $1.35 diluted EPS. The 2014 quarter included the goodwill impairment and Penford-related costs.
Outlook, risks and unusual items
- 2015 outlook: Management anticipated operating income and net income growth versus 2014. North America was expected to benefit from no repeat of the prior-year severe winter and improved price/product mix. South America was expected to deliver modest growth, principally through cost management, while Argentina operating income was expected to be flat. Asia Pacific and EMEA were expected to grow, supported by specialty-product mix and cost control. Management also flagged continued currency headwinds and challenging South American conditions.
- Penford acquisition: Ingredion agreed to acquire Penford for approximately $340 million, including assumed debt. Penford reported fiscal 2014 sales of $444 million. Closing was expected in the first quarter of 2015, subject to regulatory and other conditions; Ingredion expected the deal to be immediately accretive and planned to use cash and revolving-credit borrowings.
- Impairment and regional exposure: Ingredion recorded a non-cash $33 million goodwill impairment in the Southern Cone of South America amid higher costs, difficulty recovering inflation and currency devaluation through pricing, and political and economic uncertainty in Argentina. The $32 million of goodwill remaining in Brazil was being closely monitored.
- Liquidity and financing: The company had $87 million drawn on its $1 billion revolving credit facility, met its debt covenants at year-end, and reported approximately $485 million of unused foreign operating lines. It expected cash, operating cash flow and credit facilities to cover anticipated capital spending, dividends and other needs. Planned 2015 capital expenditures were approximately $300 million. A $350 million note maturity was due in November 2015; management stated it had the ability and intent to refinance it long term.
- Principal risks: Corn and other raw-material and energy price volatility, the ability to pass costs through, foreign-exchange and political risk (especially in South America), competition, changing consumer preferences regarding sweeteners and HFCS, supply and plant disruptions, labor relations, and acquisition execution. A 1-percentage-point increase in floating rates was estimated to raise annual interest expense by approximately $12 million.
- Contingencies: A lawsuit concerning statements about HFCS remained pending; plaintiffs sought unspecified damages and injunctive relief, and Ingredion said it intended to defend the case. Brazilian labor claims had approximately $5 million reserved. The company said other ordinary-course claims were not expected to be material, while cautioning that outcomes could not be assured.
- Other notable items: The company repurchased approximately 3.8 million shares for about $300 million under an accelerated repurchase agreement and authorized a further five-million-share repurchase program for 2015–2019. Foreign-currency translation and lower pension discount rates materially affected comprehensive income and equity.
Important facts for investors to verify
- Whether Penford closed on the expected timetable, the final acquisition financing and purchase accounting, and whether anticipated accretion and synergies were achieved.
- Whether 2015 earnings growth materialized by segment, particularly against Argentina’s flat-income outlook and continuing currency pressure.
- Whether the improved gross margin persisted as corn costs, selling prices and product mix changed.
- Whether operating cash flow and working-capital benefits were sustainable, and how the $300 million capital-spending plan affected liquidity and debt.
- Refinancing and repayment of the 2015 notes, compliance with credit-facility covenants, and changes in floating-rate exposure.
- Developments in the HFCS litigation, Brazilian labor claims, Argentina environmental discussions, and the monitored Brazil goodwill balance.