Corn Products International, Inc. (now Ingredion) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative period is Q1 2010. The filing is under the former Corn Products International name. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Business context
The company produces starches, sweeteners and other ingredients from corn and starch-based materials, with operations across North America, South America, Asia Pacific and EMEA. Q1 2011 results include National Starch, acquired October 1, 2010; Q1 2010 does not include its operating results.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $1,459.5 | $937.2 |
| Gross profit | $298.2 | $142.8 |
| Gross margin | 20.4% | 15.2% |
| Operating income | $227.4 | $71.8 |
| Income before taxes | $200.8 | $67.1 |
| Net income attributable to CPI | $153.6 | $43.4 |
| Diluted EPS | $1.97 | $0.57 |
| Operating cash flow | $22 | $57 |
| Capital expenditures | $33 | $21 |
Net sales increased 56%, reflecting 38% higher volume, 16% price/product mix improvement and 2% favorable currency translation. National Starch contributed $348 million of sales. Excluding specified unusual and integration items, management said net income grew 109% and diluted EPS 103% year over year.
Operating cash flow fell despite higher earnings, primarily because of working-capital investment: inventory increased $104 million and receivables/prepaids increased $78 million in the cash-flow reconciliation. Cash and equivalents were $267 million at March 31, versus $302 million at year-end 2010.
Total debt was approximately $1.76 billion, compared with $1.77 billion at December 31, 2010; long-term debt on the balance sheet was $1.64 billion. The weighted-average interest rate on total debt was 5.3%. The company reported $235 million drawn on its $1 billion revolving credit facility and approximately $467 million of unused foreign operating lines. Current assets were $1.943 billion and current liabilities $915 million.
Material changes and unusual items
- Net income includes a $58.4 million NAFTA arbitration award paid by Mexico, recorded in other income; management attributed $0.75 of diluted EPS to the award. The award was not taxable in the United States.
- Q1 2011 included $7.0 million of National Starch integration costs. Q1 2010 included $3.0 million of acquisition-related costs and a $2.7 million Chile earthquake insurance deductible.
- Excluding the NAFTA award and integration costs, and the comparable 2010 charges, operating income more than doubled to $176 million. Management attributed about 65% of this increase to National Starch and the remainder principally to organic growth and improved pricing.
- Gross corn cost per ton increased approximately 25%. Financing costs rose to $26.6 million from $4.7 million, mainly due to higher average borrowings following the acquisition, with currency transaction losses and higher interest rates also contributing.
- National Starch integration increased the scale and geographic reach of the business. Reported regional growth is not directly comparable without considering the acquisition; management provided selected organic comparisons in its discussion.
Outlook, risks and contingencies
- Management expected improved full-year 2011 sales and earnings. It anticipated Q2 EPS would be reduced by approximately $0.10 per diluted share by a major maintenance project at the Argo facility.
- Expected 2011 capital expenditures were approximately $280 million to $300 million. Management said operating cash flow and borrowing availability should be sufficient to fund anticipated capital spending, dividends and other plans for the foreseeable future.
- The board declared a quarterly dividend of $0.14 per share, paid April 25, 2011.
- Key disclosed risks include corn and energy prices, co-product prices, customer demand and pricing, foreign exchange and interest-rate movements, integration and expected synergies from National Starch, operating and maintenance execution, regional economic conditions, and competition. Commodity and foreign-exchange exposures are managed partly through derivatives; gains on commodity hedges in accumulated other comprehensive income were expected to be reclassified into earnings over the next 12 months and offset underlying commodity costs.
- A lawsuit filed April 22, 2011 by sugar companies against the Corn Refiners Association and certain member companies, including CPI, alleges misleading HFCS statements and seeks injunctive relief and unspecified damages. CPI said it considers the suit without merit and intends to defend it.
- Management reported disclosure controls were effective, but the evaluation excluded National Starch, which represented $348 million of Q1 sales and $1.98 billion of March 31 assets. No material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of subsequent earnings growth reflects recurring operating performance versus the one-time $58.4 million NAFTA award and acquisition-related effects.
- National Starch’s contribution to sales, margins, cash generation, integration costs and expected synergies, including whether organic comparisons remain strong.
- Whether working capital normalizes and operating cash flow supports the planned $280–$300 million of capital spending and dividends.
- Debt, interest expense and liquidity trends, including the effects of the variable-rate swap on the $350 million 2015 notes.
- Developments in the HFCS-related litigation, commodity and currency exposures, and execution of the Argo maintenance project.