Business context and reporting period
Ingredion Incorporated’s 10-K covers the fiscal year ended December 31, 2015; it also reports unaudited fourth-quarter results. The company makes starches, sweeteners, specialty ingredients and biomaterials from corn and other plant-based materials. It reports four geographic segments: North America, South America, Asia Pacific and EMEA.
Ingredion acquired specialty-starch producer Penford on March 11, 2015, for $332 million, and natural-concentrate producer Kerr on August 3, 2015, for $102 million. Acquired businesses contributed $328 million of 2015 sales and are included from their respective acquisition dates.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $5.621 billion | $5.668 billion |
| Gross profit / margin | $1.242 billion / 22% | $1.115 billion / 20% |
| Operating income | $660 million | $581 million |
| Net income attributable to Ingredion | $402 million | $355 million |
| Diluted EPS | $5.51 | $4.74 |
| Cash provided by operations | $686 million | $731 million |
| Capital expenditures | $280 million | $276 million |
| Total debt at year-end | $1.838 billion | $1.821 billion |
| Cash and cash equivalents at year-end | $434 million | $580 million |
| Working capital | $1.208 billion | $1.423 billion |
Sales declined 1%, while operating income rose 14%, attributable primarily to stronger North American results. Gross corn costs per ton fell approximately 13%; lower raw-material costs and currency translation reduced cost of sales. The gross-margin increase reflected the company’s ability to maintain per-unit gross profit despite lower selling prices.
Segment sales and operating income were: North America $3.345 billion and $479 million; South America $1.013 billion and $101 million; Asia Pacific $733 million and $107 million; EMEA $530 million and $93 million. North American operating income rose 28%; South American income fell 6%, Asia Pacific rose 4%, and EMEA fell 2%.
Fourth-quarter 2015 sales were $1.405 billion, versus $1.368 billion in fourth-quarter 2014. Net income attributable to Ingredion was $104 million versus $61 million, and diluted EPS was $1.42 versus $0.83. The 2014 quarter included a $32.8 million goodwill impairment charge; 2015 results included several restructuring, acquisition, inventory fair-value and litigation costs, partly offset by a plant-sale gain.
Net debt was $1.398 billion, compared with $1.207 billion in 2014. Net debt to adjusted EBITDA was 1.6 times, versus 1.5 times; net debt to capitalization was 37.4%, above the company’s 32%–35% objective. The company reported $440 million in cash and short-term investments, approximately $431 million held outside the United States, and approximately $409 million of unused foreign operating lines, in addition to its $1 billion revolving credit facility. It reported compliance with credit-facility covenants at year-end.
Material changes versus prior period
- Foreign currency translation reduced sales by approximately 9% and operating income by approximately $68 million year over year, with South America particularly affected.
- Sales volume increased 7%, including 1% organic growth; acquired businesses drove much of the increase. Price/product mix improved 1% overall.
- Operating cash flow fell $45 million, mainly because working-capital cash flows weakened, including a $34 million cash deposit to commodity-hedge margin accounts in 2015 versus $39 million received in 2014.
- Ingredion spent $434 million on acquisitions, issued a new $350 million term loan, repaid $350 million of senior notes at maturity, and repurchased 435,000 shares for approximately $34 million. The quarterly dividend increased 7% during 2015.
- Accumulated other comprehensive loss increased to $1.102 billion, principally reflecting a $324 million currency-translation loss for the year.
Outlook, risks and unusual items
Management expected operating income and net income to grow in 2016. It forecast North American operating-income growth from improved mix and margins; South America was expected to remain challenging, with income roughly flat; and Asia Pacific and EMEA were expected to grow modestly. Management anticipated approximately $300 million of 2016 capital expenditures and stated that cash, operating cash flow, credit access and borrowing capacity should provide sufficient liquidity for foreseeable needs.
The company announced a Brazil network consolidation: the Trombudo Central and Conchal plants were to close, with production shifted to Balsa Nova and Mogi Guaçu by the end of 2016. It recorded $12 million of related 2015 restructuring and impairment charges. It also sold its Port Colborne, Canada, plant for $35 million, recording a $10 million pretax gain and $4 million of restructuring charges; additional post-sale costs were possible but not expected to be significant.
A proposed acquisition of Shandong Huanong Specialty Corn Development in China was announced in February 2016, subject to government and customary approvals; management did not expect a material financial impact. Other notable 2015 items included $10 million of acquired-inventory fair-value costs, $10 million of acquisition and integration costs, a $7 million litigation settlement, and an after-tax plant-sale gain of $9 million.
Principal risks include commodity and energy-price volatility, inability to pass cost increases through to customers, foreign-exchange exposure, economic and political weakness in South America, competition and changing consumer preferences (including attitudes toward HFCS), manufacturing interruptions, labor disputes, environmental regulation, pension assumptions, tax audits, and impairment risk. Brazil goodwill of $22 million remained under close monitoring. The company had approximately $2.4 billion of undistributed foreign earnings treated as permanently reinvested; potential repatriation tax was not quantified.
The lawsuit concerning marketing statements about HFCS was settled and dismissed with prejudice in November 2015 for approximately $7 million. Brazilian labor claims had approximately $3 million reserved. The filing states that known other legal and regulatory matters were not expected to be material, while noting outcomes remain uncertain. The independent auditor gave an unqualified opinion on the financial statements and internal control; Kerr was excluded from the year-end internal-control assessment.
Important facts for investors to verify
- Whether 2016 earnings growth materialized, particularly given management’s cautious South America outlook and continuing currency exposure.
- Organic growth, acquired-business contributions, integration progress and realized benefits from Penford and Kerr.
- Cash conversion and working-capital trends, including future commodity-hedging margin calls and the funding of planned capital expenditures and dividends.
- Debt reduction and covenant headroom, especially the $350 million term loan due in January 2017 and substantial debt maturities in 2017.
- Execution costs and savings from Brazil plant consolidation, and any further impairment indicators for South American assets and goodwill.
- Resolution of Brazilian labor claims, environmental matters, tax exposures and any post-closing costs from the Port Colborne sale.