Ingredion Incorporated — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Ingredion produces starches and sweeteners and other food and industrial ingredients, operating across North America, South America, Asia Pacific, and EMEA.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $1.453 billion | $1.360 billion | +7% |
| Gross profit | $352 million | $339 million | +4% |
| Operating income | $195 million | $200 million | -3% |
| Net income attributable to Ingredion | $124 million | $130 million | -5% |
| Diluted EPS | $1.68 | $1.77 | -5% |
| Operating cash flow | $131 million | $99 million | +$32 million |
Gross margin was approximately 24%, down from 25%; operating margin was approximately 13.4%, versus 14.7%. Sales growth reflected 5% volume growth (including acquisition contribution) and 2% favorable currency translation. Cost of sales rose 8%, including higher sales volume, approximately 6% higher gross corn costs per ton, and currency effects. Financing costs increased to $21 million from $14 million, mainly due to higher borrowing costs and foreign-currency transaction losses. The effective tax rate declined to 27.0% from 28.5%.
Segment sales and operating income: North America $881 million / $160 million (prior year $841 million / $149 million); South America $255 million / $14 million ($215 million / $18 million); Asia Pacific $179 million / $30 million ($169 million / $28 million); EMEA $138 million / $28 million ($135 million / $26 million). South America earnings fell 22%; the other three segments reported higher operating income.
Cash, debt, and liquidity
Cash and cash equivalents were $435 million at March 31, 2017, down from $512 million at year-end; cash plus short-term investments totaled $448 million. Total debt was $2.013 billion, up from $1.956 billion, comprising $1.895 billion long-term debt and $118 million short-term borrowings. The weighted-average interest rate on indebtedness was approximately 4.5%, versus 3.7% a year earlier. Operating cash flow improved, while investing activities used $93 million, including $72 million of capital expenditures and $13 million paid for the Sun Flour acquisition. Financing activities used $121 million, including $123 million of share repurchases and $44 million of dividends paid.
At March 31, the company had $44 million outstanding under its revolving credit facility and approximately $434 million of unused foreign operating lines of credit. The filing says available cash, operating cash flow, debt-market access, and credit capacity are expected to fund anticipated needs. Approximately $406 million of cash and short-term investments was held outside the United States. The $200 million 6.0% notes matured in April 2017 and were refinanced using the revolving credit facility; $300 million of 1.8% notes were due in September 2017.
Material changes and notable items
- Ingredion acquired Sun Flour in Thailand on March 9 for $18 million: $13 million paid in cash and $5 million recorded as deferred payment. The acquisition added a rice-ingredient manufacturing facility; its Q1 impact was not material.
- Q1 operating income included $10 million of net restructuring charges, principally $11 million of Argentine severance costs, partly offset by a $1 million reduction in expected IT-outsourcing severance costs. It also included $5 million of acquired-inventory fair-value costs and $2 million of acquisition/integration costs.
- Management stated that excluding restructuring and acquisition-related charges, Q1 operating income would have grown 5% and net income and diluted EPS would have grown 6% year over year. These are management’s adjusted comparisons, not reported GAAP results.
- Ingredion repurchased approximately 1.039 million shares for $123 million in Q1. The board declared a $0.50-per-share quarterly dividend, paid April 25, 2017.
Outlook, risks, and contingencies
Management expected full-year 2017 operating income and net income to grow versus 2016. It anticipated growth in North America, EMEA, and Asia Pacific, while South America was expected to be flat to down amid slow economic activity and elevated costs. Planned 2017 capital expenditures were approximately $300 million to $325 million.
Argentina’s labor union notified the company on April 28 of its intent to strike in response to the restructuring. Management said it would continue discussions and could consider strategic alternatives if it cannot reach an effective outcome; those alternatives could result in future impairment charges. The filing also identifies exposure to commodity prices, foreign exchange and interest rates, economic and political conditions (particularly in South America), labor disputes, raw-material availability, and acquisition integration and synergy risks.
The company had reserved approximately $5 million for Brazilian labor claims. It reported other ordinary-course legal, environmental, and regulatory matters, while cautioning that future or aggregate outcomes cannot be assured immaterial. Management expected adoption of the new lease standard to materially increase balance-sheet assets and liabilities; its revenue-standard assessment was preliminary and indicated no expected material effect, subject to completion.
Most important facts to verify
- Whether the expected 2017 earnings growth and regional outlook were achieved, particularly South America’s flat-to-down projection.
- Developments in the Argentine labor dispute, restructuring savings, and any resulting impairment or additional charges.
- Debt refinancing and liquidity after the April 2017 repayment of the $200 million notes, and the September 2017 maturity of $300 million of notes.
- Whether cost inflation, foreign exchange, and acquisition integration affect margins and the expected benefits from TIC Gums, Shandong Huanong, and Sun Flour.
- Progress and final impact of the lease-accounting transition and the company’s revenue-standard assessment.