Ingredion Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results; amounts in U.S. dollars unless noted. Ingredion produces starches and sweeteners and reports through North America, South America, Asia Pacific, and EMEA.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1.485bn | $1.489bn | $4.395bn | $4.304bn |
| Gross profit | $388m | $369m | $1.113bn | $1.063bn |
| Operating income | $233m | $221m | $639m | $619m |
| Net income attributable to Ingredion | $166m | $143m | $420m | $391m |
| Diluted EPS | $2.26 | $1.93 | $5.72 | $5.29 |
| Cash from operating activities | — | — | $524m | $542m |
- Q3 net sales were flat year over year; nine-month sales rose 2%. Q3 volume growth was offset by lower price/product mix, while nine-month growth reflected acquisitions, organic volume and currency translation, partly offset by lower price/product mix.
- Gross margin was 26% in Q3, up from 25%; nine-month gross margin held at 25%. Management cited lower raw-material costs and operational efficiencies, partly offset over the nine months by Argentina’s manufacturing disruption and higher costs.
- Q3 net income rose 16%; nine-month net income rose 7%. Financing costs increased to $16m in Q3 from $15m and to $57m for nine months from $48m, reflecting higher short-term borrowing costs and borrowings; nine-month costs also included higher foreign-currency transaction losses.
- At September 30, cash and cash equivalents were $491m, short-term investments $14m, current assets $2.266bn and current liabilities $940m. Total debt was $1.884bn, versus $1.956bn at year-end 2016; long-term debt was $1.731bn and short-term borrowings $153m. Weighted-average interest rate on total debt was approximately 4.1% for the nine months.
- Operating cash flow was $524m, down from $542m. The company attributed the decrease primarily to working-capital outflows, including a $63m IRS payment to complete the U.S.-Canada tax settlement. Capital expenditures were $222m; cash used for investing was $244m and cash used for financing was $319m. Financing included $123m of first-quarter share repurchases and $120m of dividends paid.
Changes, outlook and notable items
- North America was the principal earnings-growth driver: Q3 operating income increased 9% to $179m and nine-month operating income increased 10% to $520m. South America operating income declined 25% for the nine months to $44m amid difficult conditions, Argentina disruption and unfavorable price/product mix. Asia Pacific and EMEA nine-month operating income was $88m and $83m, respectively.
- Management expected full-year 2017 operating income and net income to grow versus 2016. Segment outlook: North America operating income expected to increase; South America expected to decline; EMEA and Asia Pacific expected to grow. No numerical earnings guidance was provided. Planned 2017 capital expenditures were approximately $300m–$325m.
- Ingredion recorded $23m of restructuring charges for the nine months, including $17m related to Argentina. A labor strike interrupted Argentine manufacturing in Q2 and ended June 1 after a new labor agreement. The North America Finance Transformation initiative is expected to add $3m–$5m of costs in Q4 2017 and $1m–$2m in 2018.
- Q3 results included a $10m tax benefit ($0.14 per diluted share) from a deductible foreign-exchange loss tied to the finalized U.S.-Canada tax settlement, partly offset by restructuring and acquisition-integration costs. Nine-month results also included $9m of acquired-inventory fair-value costs and $3m of acquisition-integration costs. Excluding specified acquisition, restructuring, inventory-markup and settlement items, management said net income grew 12% in Q3 and 9% for nine months.
- Acquisitions included Sun Flour in Thailand for $18m in March 2017; TIC Gums and Shandong Huanong were acquired in late 2016. The company said Sun Flour did not materially affect Q3 results. Purchase accounting remained open for certain acquisitions.
- After quarter-end, Ingredion drew a further $40m under its term loan on October 25, bringing the facility total to $420m, due April 25, 2019. At September 30, $380m was outstanding under the term loan and none under the revolving facility. Management expected cash, operating cash flow, debt-market access and credit capacity to cover foreseeable needs; approximately $484m of $505m in cash and short-term investments was held outside the U.S.
- Key risks include commodity and energy price volatility, foreign-exchange and interest-rate movements, South American economic and political conditions, customer demand and pricing, labor disputes, weather and supply interruptions, and integration and realization of acquisition benefits. The company disclosed Brazilian labor claims with approximately $5m reserved and other ordinary-course legal and environmental matters; it did not expect currently known matters to be material, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether full-year earnings growth and segment outlook were achieved, particularly the expected South America decline and North America growth.
- The earnings effect and cash timing of the U.S.-Canada tax settlement, including the $63m IRS payment and $10m tax benefit.
- Term-loan interest rates, covenant compliance, and repayment or refinancing plans for the $420m due in April 2019.
- Progress on Argentina cost restructuring and North America Finance Transformation costs, alongside any further operational interruptions.
- Acquisition integration, final purchase-price allocations, and the sustainability of reported growth after acquisition and other unusual items.