Ingredion Incorporated — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Ingredion produces starches and sweeteners for food, beverage, animal feed, paper, brewing and other industries, operating across North America, South America, Asia Pacific and EMEA.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $1,330.1 million | $1,357.2 million | Down 2% |
| Gross profit | $280.7 million | $249.8 million | Up 12% |
| Gross margin | 21.1% | 18.4% | Up 2.7 percentage points |
| Operating income | $139.5 million | $122.3 million | Up 14% |
| Net income attributable to Ingredion | $83.7 million | $72.6 million | Up 15% |
| Diluted EPS | $1.15 | $0.96 | Up 20% |
| Cash provided by operating activities | $69 million | $121 million | Down $52 million |
Reported operating income included $10.4 million of restructuring charges, $3.7 million of acquisition and integration costs, and $3 million of acquired-inventory fair-value costs. Management said that excluding these acquisition-related costs, operating income would have increased 28%, net income 31%, and diluted EPS 35% year over year. These are management’s adjusted comparisons, not reported GAAP results.
Segments and drivers
- North America: Sales were $754 million, up 2%; operating income was $102.1 million versus $65.2 million. Better weather, volume, lower corn and energy costs, and approximately $4 million of business-interruption insurance recoveries supported results. Penford contributed to reported sales.
- South America: Sales fell 12% to $258.1 million and operating income fell 18% to $24.6 million. Lower demand, especially in Brazil, and currency weakness weighed on results; improved pricing partly offset these pressures.
- Asia Pacific: Sales rose 1% to $186.9 million; operating income was essentially flat at $25.6 million. Volume growth was offset by pricing and currency effects.
- EMEA: Sales fell 7% to $131.1 million; operating income rose 5% to $22.1 million. Improved prices and lower costs partly offset foreign-exchange headwinds.
Net sales excluding Penford declined 4%. Management attributed the overall decline principally to 6% unfavorable currency translation; 3% organic volume growth was partly offset by a 1% price/product-mix decline. Lower raw-material costs and currency translation reduced cost of sales; gross corn cost per ton was down approximately 12% year over year.
Cash, debt and liquidity
- Cash and cash equivalents were $573 million at March 31, 2015, versus $580 million at year-end; short-term investments were $36 million, bringing cash and short-term investments to $609 million.
- Operating cash flow was $69 million. Investing activities used $393 million, including the $332 million Penford acquisition payment and $58 million of net capital expenditures. Financing activities provided $346 million, primarily reflecting $435 million of borrowing proceeds.
- Total debt was approximately $2.23 billion, up from $1.83 billion at December 31, 2014. Long-term debt on the balance sheet was $2.208 billion and short-term borrowings were $22 million. Revolver borrowings rose to $483 million from $87 million, primarily to fund Penford.
- The $1 billion revolving credit facility matures in October 2017; the filing also reports approximately $428 million of unused foreign operating lines. A $350 million note due November 2015 is classified as long-term because the company says it can and intends to refinance it.
- Quarterly capital expenditures were $58 million; management expected approximately $300 million for full-year 2015. The company repurchased 234,000 shares for approximately $18 million and paid $32 million in dividends during the quarter.
Management said available cash, expected operating cash flow, debt-market access and credit facilities should provide sufficient liquidity for anticipated spending, dividends and other needs for the foreseeable future. Approximately $573 million of cash and short-term investments was held outside the United States.
Acquisition, outlook and risks
Ingredion completed its acquisition of Penford Corporation on March 11, 2015, for stated consideration of $332 million, funded with revolving-credit borrowings. Penford’s results are included from that date in North America. The preliminary purchase-price allocation included $107 million of goodwill, which the company said is not tax deductible. The valuation remained preliminary, particularly for tangible and identifiable intangible assets, and management expected to finalize it during 2015. The quarter included $4 million of pre-tax acquisition and integration costs and a $10 million pre-tax employee-severance charge; some severance payments were expected to continue through 2017.
Management expected North America to continue driving bottom-line growth through stronger volumes and improved mix; Asia Pacific to improve modestly; EMEA to be roughly in line with the prior year; and South America to be roughly in line overall, with Andean strength offsetting softness in Brazil and the Southern Cone. The company also expected South America to remain challenged by difficult economic conditions. No specific full-year earnings or revenue guidance was provided in the filing text.
Key risks include foreign-exchange movements, economic and political conditions in South America and Europe, commodity and energy prices, customer demand and pricing, hedging outcomes, and the ability to integrate Penford and realize expected benefits. The filing reports a $146 million currency-translation loss in other comprehensive income; total comprehensive loss attributable to Ingredion was $59 million, versus $80 million of comprehensive income in Q1 2014. Management also noted that Argentine exchange controls create a parallel market with less favorable rates than the official rate.
The effective tax rate rose to 31.7% from 28.8%, including an estimated 1.5-percentage-point adverse effect from the Mexican peso’s decline. The company said approximately $2 million of unrecognized tax benefits could be recognized in Q2 or Q3 2015 if statutes of limitation lapse. Management estimated approximately $18 million of after-tax commodity-hedge losses in accumulated other comprehensive loss would be reclassified to earnings over the next 12 months, and expected the losses to be offset by changes in underlying commodity costs.
Important facts for investors to verify
- How final Penford purchase accounting, integration costs, synergies and severance affect subsequent earnings and cash flow.
- Whether North American volume and margin improvements persist after the benefit of easier weather comparisons and insurance recoveries.
- Whether South American demand, currencies and operating conditions improve as management anticipated.
- How debt refinancing, higher leverage and the $300 million full-year capital-spending plan affect liquidity and financing costs.
- Whether hedge losses, foreign-exchange movements and the stated tax-benefit timing develop as expected.