Ingredion Incorporated — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 24, 2014. The filing also reports unaudited fourth-quarter results. Ingredion manufactures starches, sweeteners and related ingredients, operating across North America, South America, Asia Pacific and EMEA.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net sales | $6.328 billion | $6.532 billion | Down 3% |
| Gross profit / margin | $1.131 billion / 17.9% | $1.238 billion / 19.0% | Margin down 1.1 percentage points |
| Operating income / margin | $613 million / 9.7% | $668 million / 10.2% | Down 8% |
| Net income attributable to Ingredion | $396 million | $428 million | Down 7% |
| Diluted EPS | $5.05 | $5.47 | Down 8% |
| Cash provided by operations | $619 million | $732 million | Down $113 million |
| Capital expenditures | $298 million | $313 million | Down $15 million |
Operating cash flow less capital expenditures was approximately $321 million, a derived figure rather than a company-reported free-cash-flow measure. Year-end cash was $574 million; total debt was $1.810 billion and net debt was $1.236 billion. The $1 billion revolving credit facility had no borrowings outstanding, and the company reported compliance with its covenants. Current assets were $2.214 billion versus current liabilities of $820 million. Management’s non-GAAP net-debt-to-adjusted-EBITDA ratio was 1.5x, compared with 1.3x in 2012.
2013 diluted EPS includes reported results with no restructuring or impairment charges. For context, 2012 included restructuring and impairment charges, integration costs, tax and benefit-plan gains, and a land-sale gain; the company said earnings excluding specified items declined 9% in 2013.
Fourth quarter: Net sales were $1.499 billion versus $1.644 billion in Q4 2012; net income attributable to Ingredion was $104 million versus $112 million; diluted EPS was $1.35 versus $1.42.
Material changes and business performance
- South America was the principal earnings weakness: sales declined 9% to $1.334 billion and operating income fell 41% to $116 million. Higher corn, energy and labor costs—particularly in Argentina—could not be fully recovered through pricing, while weak demand reduced volume and fixed-cost absorption.
- North America sales declined 3% to $3.647 billion and operating income declined 2% to $401 million. Lower volumes were partly offset by pricing and cost savings, despite historically high corn prices.
- Asia Pacific sales declined 1% to $805 million, while operating income rose 2% to $97 million. Excluding the prior-year contribution from the sold GFEMS subsidiary, sales and volume increased.
- EMEA sales rose 6% to $542 million, while operating income declined 6% to $74 million, reflecting unfavorable currency translation and higher local production and energy costs, including in Pakistan.
- Foreign-currency translation reduced sales by about 3% and operating income by approximately $21 million. Comprehensive income attributable to Ingredion was $288 million versus $366 million, with foreign-currency translation and hedge movements among the principal factors.
- Operating cash flow fell mainly because working capital absorbed cash, including timing-related decreases in payables and accrued liabilities and higher receivables; lower net income also contributed.
Outlook, risks and contingencies
- Management anticipated higher operating income in 2014 than in 2013, but provided no numerical earnings or EPS guidance. It expected North American operating income to improve slightly despite lower sales as lower corn costs were passed to customers; South America, Asia Pacific and EMEA were expected to improve, subject to regional risks.
- Management cautioned that South America—especially Argentina—would remain challenging due to high production costs, peso devaluation, pricing limitations and volume pressure. Argentine price controls could delay cost recovery; a parallel exchange market also existed at less favorable rates than the official rate.
- Management expected 2014 capital expenditures of $300–$350 million and stated that cash, operating cash flow and available borrowing capacity should fund anticipated investment, dividends and other activities for the foreseeable future.
- Key operating risks include volatility or disruption in corn and other raw-material supplies, energy costs and availability, inability to pass cost increases through to customers, competition, consumer preferences concerning HFCS, foreign exchange and political risk, plant reliability, labor relations, and pension assumptions. Raw materials represent approximately 40%–65% of finished-product costs; energy is approximately 10%.
- A sugar-industry lawsuit alleges misleading HFCS-related statements and seeks injunctive relief and unspecified damages. Ingredion says it believes the claims are without merit and will defend them; its counterclaim against the Sugar Association was allowed to proceed. The filing does not state a clear potential loss amount.
- Ingredion was discussing possible environmental remediation studies at its Chacabuco, Argentina plant; it could not predict the outcome but did not expect the ultimate cost to be material. Other ordinary-course legal, environmental and product-liability matters were not expected by management to be material, though no assurance was given.
- The company repurchased $228 million of common stock and paid $112 million in dividends during 2013. It declared $1.56 per share in dividends for the year, up from $0.92 in 2012, and authorized a new program for up to 4 million shares.
- KPMG gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether South American pricing, volume and currency conditions—particularly in Argentina—improve enough to recover costs and support the 2014 operating-income outlook.
- Cash conversion and working-capital trends, alongside the planned $300–$350 million of 2014 capital expenditures, dividends and share repurchases.
- Debt maturities, covenant headroom and the effect of interest-rate and foreign-exchange movements; the company estimated a 1-percentage-point increase in floating rates would add about $4 million to annual interest expense.
- Commodity hedge balances and expected earnings reclassifications: about $31 million of after-tax commodity-hedge losses were expected to enter earnings over the next 12 months, with management expecting offsets from underlying costs.
- Developments in the HFCS litigation, Argentine environmental discussions and tax matters, including $34 million of unrecognized tax benefits whose timing of resolution is uncertain.