Ingredion Inc quarterly report, Q2 FY2010

Business context and reporting period

Ingredion’s filing was made under its then-legal name, Corn Products International, Inc. (CPI), for the quarter and six months ended June 30, 2010. CPI operates a global corn-refining business across North America, South America and Asia/Africa.

Financial performance

Management attributed the improvement mainly to higher sales volumes, improved plant utilization, lower corn costs and favorable currency translation; lower financing costs also helped. Reported earnings included Chile impairment and related charges and National Starch acquisition costs. Excluding impairment, restructuring and acquisition-related costs, management said operating income grew 90% in Q2 and 94% in the first half; these are management-adjusted comparisons, not reported GAAP results.

Financial position and cash flow

At June 30, 2010, cash was $326 million, up from $175 million at year-end 2009. Current assets were $1.254 billion and current liabilities $576 million. Total debt was $599 million, versus $544 million at year-end; the company had no borrowings under its $500 million revolving credit facilities and reported about $404 million of unused foreign operating lines. Long-term debt carrying value was $499 million; its estimated fair value was $526 million.

First-half operating cash flow of $185 million was below the prior-year $211 million, principally because working-capital cash flow declined, including cash used to fund commodity-hedge margin accounts. Investing activities used $56 million, including capital expenditures. Financing activities provided $24 million. Full-year 2010 capital expenditure guidance was approximately $150–$175 million.

Material changes versus the prior comparable period

• Revenue increased, led by volume growth and currency effects, while price/product mix declined 11% in Q2 and 10% in the first half.
• Regional sales were strongest in South America and Asia/Africa. North American sales were nearly flat in Q2 and slightly higher for the first half.
• The 2009 comparisons included a $125 million impairment and restructuring charge, including a $119 million South Korea goodwill write-off. In 2010, first-half impairment and related charges were $21 million, principally for earthquake damage to the Llay-Llay, Chile plant.
• Financing costs declined 37% in Q2 and 48% in the first half year over year. Total debt increased, including issuance of $200 million of 5.62% senior notes due 2020.

Outlook, risks and unusual items

Management expected improved sales and earnings for full-year 2010, while cautioning that second-half comparisons would be more difficult and that an economic slowdown, particularly in the United States in Q4, was a risk. It expected operating cash flow, credit availability, capital-market access and acquisition financing to provide sufficient liquidity for foreseeable needs.

CPI agreed to acquire National Starch for an estimated $1.3 billion in cash, with closing expected near the end of Q3 2010 subject to customary regulatory approvals. A $1.35 billion bridge-financing commitment had been obtained, and $16 million of commitment fees were paid. Funding was expected from cash and debt, or a combination of debt and common stock.

The Chile earthquake impaired plant assets and disrupted local operations; customer shipments were being supplied from Argentina, Brazil and Mexico. The company had $35 million of after-tax cash-flow hedge losses in accumulated other comprehensive loss expected to be reclassified into earnings over the next 12 months, which it expected to be offset by changes in underlying commodity costs.

A NAFTA tribunal awarded $58.4 million in damages relating to Mexico’s former tax on HFCS-sweetened beverages. The award was corrected to make payment to CPI, but Mexico had filed an application challenging the correction. CPI had not recorded the award in its financial statements. Key risks cited include commodity and co-product prices, foreign exchange, demand and pricing, economic conditions, energy and freight costs, financing markets, competition, operating disruptions and acquisition integration.

Important facts for investors to verify

• Whether the National Starch acquisition closed on the expected timetable, its final funding mix and resulting debt and share dilution.
• The scope, insurance recovery and operational impact of the Chile plant damage, including any further charges.
• Subsequent developments and collectability of the $58.4 million NAFTA award, which was not recognized in the reported financial statements.
• Whether the full-year earnings outlook and $150–$175 million capital expenditure range were achieved.
• Commodity-hedge positions and the timing and earnings effects of the $35 million after-tax hedge losses.