Ingredion Incorporated — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results are compared with the corresponding 2012 periods. Ingredion produces starches and sweeteners for food, beverage, animal feed, paper, brewing and other industries, operating across four geographic segments.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $1,633.4 million | $1,635.0 million | $3,217.3 million | $3,209.2 million |
| Gross profit | $276.0 million | $295.2 million | $581.6 million | $591.1 million |
| Gross margin | 16.9% | 18.1% | 18.1% | 18.4% |
| Operating income | $140.1 million | $152.9 million | $315.2 million | $313.8 million |
| Net income attributable to Ingredion | $95.1 million | $109.1 million | $205.8 million | $203.3 million |
| Diluted EPS | $1.20 | $1.40 | $2.61 | $2.61 |
| Operating cash flow | Not separately stated | Not separately stated | $112 million | $318 million |
Q2 sales were essentially flat: 5% better price/product mix was offset by 3% lower volume and 2% unfavorable currency translation. First-half sales were also essentially flat, with the same mix of price, volume and currency effects. Q2 operating income, net income and diluted EPS fell 8%, 13% and 14%, respectively, year over year. First-half net income increased modestly, while diluted EPS was unchanged.
Cost of sales rose 1% in both periods. Gross corn costs per ton increased approximately 8% in Q2 and 7% in the first half. Operating expenses increased to $138.5 million in Q2 and $274.1 million for the first half. Financing costs declined to $16.3 million and $33.0 million, respectively, mainly due to lower average borrowings and interest rates.
Segments and material changes
- North America: Q2 sales rose 3% to $976.8 million and operating income rose 7% to $103.9 million, supported by pricing and cost savings. First-half operating income increased 7% to $211.6 million.
- South America: Q2 sales fell 8% to $320.8 million and operating income fell 63% to $17.3 million. First-half sales fell 7% to $669.5 million and operating income fell 35% to $60.6 million. Weak demand, currency depreciation, higher local costs and limited pricing recovery weighed on results.
- Asia Pacific: Q2 sales fell 4% to $200.2 million; operating income increased 3% to $23.6 million. Sales comparisons were affected by the 2012 sale of the GFEMS investment in China.
- EMEA: Q2 sales increased 6% to $135.6 million, while operating income declined 10% to $16.9 million, reflecting higher local product and energy costs and unfavorable currency translation.
Q2 2012 operating results included $13.6 million of restructuring/impairment charges and $1.3 million of integration costs; the first-half comparisons included $17.4 million and $3.7 million, respectively. Management said that excluding prior-year restructuring, impairment and integration costs, operating income would have declined 17% in Q2 and 6% for the first half.
Cash, debt and liquidity
- Cash and cash equivalents were $569 million at June 30, 2013, versus $609 million at year-end 2012; short-term investments were nil, versus $19 million.
- First-half operating cash flow was $112 million, down from $318 million. Working capital absorbed cash, including increases in receivables and inventories and lower accounts payable/accrued liabilities.
- Capital expenditures were $132 million in the first half. Management expects full-year 2013 capital expenditures of approximately $300–$350 million.
- Total debt was approximately $1.81 billion, versus $1.80 billion at December 31, 2012. The weighted-average interest rate was approximately 4.3% for the first half. The $1 billion revolving credit facility had no borrowings outstanding; approximately $483 million of foreign operating lines were also unused.
- Management expects cash, operating cash flow and available borrowing capacity to fund anticipated capital expenditures, dividends and other needs for the foreseeable future. Approximately $309 million of cash was held outside the United States.
Outlook, risks and unusual items
- Management expects full-year 2013 diluted EPS to decline from 2012; no numerical EPS guidance is provided in the filing. It expects South America to remain challenged by high product costs, currency devaluation, pricing limitations and volume pressure.
- A $4 million charge related to fungus affecting stevia plants in Brazil further reduced South American operating income.
- Q2 2013 included a $5 million tax benefit from a favorable Canadian court determination and approximately $3 million from recognition of previously unrecognized tax benefits. The filing says approximately $3 million more may be recognized in Q3 due to a statute-of-limitations lapse.
- Q2 2012 benefited from a $13 million reversal of a Korean deferred-tax valuation allowance; comparisons also include Kenya restructuring-related tax benefits and charges. These prior-year items affect reported period comparisons.
- Commodity, foreign-exchange and interest-rate exposures are managed with derivatives. AOCI included $42 million of after-tax losses on commodity cash-flow hedges; approximately $39 million was expected to be reclassified into earnings over the next 12 months, with management expecting offsets from underlying commodity costs.
- First-half comprehensive income attributable to Ingredion was $66 million, versus $181 million a year earlier, primarily reflecting unfavorable currency translation and cash-flow hedge movements. The filing identifies global economic conditions, commodity and energy prices, foreign exchange, customer demand, raw-material availability and operating risks among factors that could affect results.
Facts investors should verify
- Whether South American demand, pricing and cost pressures persist, and whether the business can recover higher input costs.
- Whether operating cash flow improves as working capital normalizes, given the first-half decline to $112 million.
- How the $39 million of expected commodity-hedge losses reclassified into earnings compare with the anticipated offsets in input costs.
- Full-year EPS direction and capital spending against management’s stated outlook; the filing gives no numerical EPS target.
- The effects of prior-period tax benefits and restructuring items when assessing underlying year-over-year earnings trends.