Ingredion Incorporated (10-Q) — Quarter ended June 30, 2012
Ingredion, formerly Corn Products International, produces starches, sweeteners, food ingredients and industrial products through four geographic segments. The company’s stockholders approved its name change in May 2012. This filing reports unaudited results for the second quarter and first six months of 2012, compared with the same 2011 periods.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $1.635 billion | $1.585 billion | $3.209 billion | $3.044 billion |
| Gross profit | $295.2 million | $271.8 million | $591.1 million | $570.0 million |
| Operating income | $152.9 million | $134.9 million | $313.8 million | $362.3 million |
| Net income attributable to Ingredion | $109.1 million | $79.3 million | $203.3 million | $232.9 million |
| Diluted EPS | $1.40 | $1.01 | $2.61 | $2.97 |
| Gross margin | 18.1% | 17.2% | 18.4% | 18.7% |
Q2 net sales increased 3%; reported operating income rose 13% and attributable net income rose 38%. First-half sales increased 5%, while reported operating income and attributable net income declined 13% and 13%, respectively. Management said that excluding specified restructuring, integration and impairment items—and the 2011 NAFTA award—operating income increased 15% in Q2 and 4% in the first half; attributable net income increased 20% and 8%, and diluted EPS increased 21% and 9%, respectively.
Q2 sales reflected 5% better price/product mix and 3% volume growth, partly offset by 5% unfavorable currency translation. First-half sales reflected 6% better price/product mix and 2% volume growth, partly offset by 3% unfavorable currency translation. Higher corn costs contributed to increased cost of sales. Operating expenses declined year over year; as a share of sales they were 8.0% in Q2 and 8.3% in the first half.
Regional Q2 sales and operating income were: North America $949.7 million and $96.9 million; South America $349.1 million and $47.3 million; Asia Pacific $208.1 million and $22.9 million; and EMEA $128.1 million and $18.8 million. North America led earnings growth, supported by improved pricing and volume. South America faced softer demand and currency weakness; EMEA was pressured by weaker demand, currency and energy costs. First-half regional operating income increased in North America and Asia Pacific, and declined in South America and EMEA.
Cash flow, debt and liquidity
- First-half operating cash flow was $318 million, versus $102 million in 2011, primarily reflecting a smaller working-capital investment, including lower inventory use of cash and reduced commodity-hedging margin accounts.
- Capital expenditures were $128 million in the first half. Cash and cash equivalents were $440 million at June 30, 2012, up from $401 million at year-end; approximately $391 million was held outside the United States.
- Total debt was approximately $1.84 billion, down from $1.95 billion at December 31, 2011. The weighted-average interest rate was approximately 4.4% for the first half, versus 5.0% a year earlier.
- The company reported $350 million drawn under its $1 billion revolving credit agreement, maturing June 2014, and approximately $528 million of unused foreign operating lines of credit. Management expected operating cash flow and borrowing availability to cover anticipated needs for the foreseeable future.
- A quarterly dividend of $0.20 per share was declared; payment was made July 25, 2012. First-half dividends paid, including to non-controlling interests, were $33 million.
Outlook, material items and risks
- Management described Q2 as a record second quarter for net sales, operating income, net income and diluted EPS, said first-half performance was as expected, and anticipated a strong second half. Full-year 2012 capital expenditures were projected at approximately $275 million to $325 million.
- The company decided to close its Kenya manufacturing plant and recorded $10 million of Q2 charges, including a $6 million asset impairment, a $2 million working-capital write-down and $2 million of primarily severance costs. It expected approximately $12 million of additional charges in the second half, including about $7 million from currency translation, and anticipated completing the disposal by year-end.
- North American manufacturing optimization generated $7 million of first-half 2012 charges; approximately $4 million of additional charges were expected in the second half. National Starch integration costs were $4 million in the first half.
- Q2 and first-half 2012 tax rates were 18.4% and 25.6%. The Q2 rate benefited from a $13 million reversal of a Korean deferred-tax valuation allowance and a $6 million tax benefit associated with the Kenya charge. Without these items, management estimated rates of approximately 30% and 31%, respectively. Approximately $4 million of previously unrecognized tax benefits was expected to be recognized in Q3.
- First-half 2011 results included a $58.4 million NAFTA award, a significant comparison item. The award followed a claim concerning Mexico’s former tax on HFCS-sweetened beverages; the company received the payment in 2011.
- Key disclosed exposures include corn and natural-gas costs, co-product pricing, foreign exchange, interest rates, global economic conditions, demand in Europe and South America, energy shortages in Pakistan, labor and transportation disruptions, and severe U.S. drought conditions that could affect corn yields and availability. The company hedges certain commodity, currency and interest-rate exposures but cannot hedge co-product price risk.
- A lawsuit brought by sugar producers concerning HFCS-related statements remained pending: the court denied a motion to dismiss the amended federal claims against Ingredion and other CRA member companies on July 31, 2012. Ingredion said it believed the claims lacked merit and intended to defend the case. Plaintiffs sought injunctive relief and unspecified damages.
Important facts for investors to verify
- Whether the anticipated strong second half and 2012 capital-spending plan remain on track, and whether the Kenya closure and North American optimization charges match the estimates disclosed.
- How much of Q2 and first-half earnings growth reflects underlying operations versus the Korean tax benefit and other unusual items; also compare against the 2011 NAFTA award.
- Whether pricing and volume continue to offset corn-cost inflation, and whether regional weakness, energy constraints and currency movements persist.
- Debt, revolving-credit availability, cash held overseas and liquidity needs, including the implications of foreign-currency movements and working-capital changes.
- Developments in the HFCS-related litigation and the potential outcome or financial exposure, which the filing does not quantify.