Ingredion Incorporated — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Ingredion produces starches and sweeteners and reports four geographic segments: North America, South America, Asia Pacific, and EMEA. The interim financial statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $1,448.9 million | $1,482.7 million | $2,779.1 million | $2,839.8 million |
| Gross profit | $318.6 million | $295.9 million | $599.3 million | $545.7 million |
| Gross margin | 22% | 20% | 22% | 19% |
| Operating income | $172.5 million | $162.6 million | $312.0 million | $284.9 million |
| Net income attributable to Ingredion | $106.7 million | $102.6 million | $190.3 million | $175.2 million |
| Diluted EPS | $1.47 | $1.35 | $2.62 | $2.31 |
| Operating cash flow | Not provided for the quarter | $248 million | $229 million |
Q2 reported diluted EPS rose 9%; first-half EPS rose 13%. Management said that excluding specified Penford-related charges, diluted EPS growth was 13% for Q2 and 23% for the first half. Net sales declined 2% in both periods, primarily due to unfavorable foreign-currency translation of 7% and a 1% price/product-mix decline, which offset volume growth of 6% (including Penford). Q2 organic volume was flat; first-half organic volume grew 1%.
Lower raw-material costs and currency effects reduced cost of sales. Gross corn costs per ton fell approximately 16% in Q2 and 14% in the first half. North America’s improved results were the principal driver of higher operating income. The reported periods include Penford from its March 11, 2015 acquisition date.
Segment results
| Segment | Q2 net sales | Q2 operating income | First-half net sales | First-half operating income |
|---|---|---|---|---|
| North America | $869.1 million | $127.2 million | $1,623.1 million | $229.2 million |
| South America | $250.0 million | $20.0 million | $508.1 million | $44.7 million |
| Asia Pacific | $191.7 million | $28.0 million | $378.7 million | $53.6 million |
| EMEA | $138.1 million | $22.9 million | $269.2 million | $45.1 million |
Versus Q2 2014, North America sales rose 6% and operating income rose 15%, reflecting Penford, lower costs, and approximately $4 million of weather-related business interruption insurance recoveries. South America sales fell 18%, while operating income increased from a weak prior-year comparison. Asia Pacific sales fell 6% and operating income was essentially flat; EMEA sales fell 11% and operating income fell 9%. Currency translation reduced Q2 operating income by approximately $15 million overall and first-half operating income by approximately $25 million.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $657 million and short-term investments were $20 million. Current assets were $2.276 billion and current liabilities were $664 million.
- Total debt was approximately $2.21 billion, up from $1.83 billion at December 31, 2014; long-term debt on the balance sheet was $2.163 billion and short-term borrowings were $49 million. Revolver borrowings increased to $446 million from $87 million, primarily to fund Penford. The weighted-average interest rate on debt was approximately 3.4% for the first half, compared with 4.4% a year earlier.
- First-half operating cash flow of $248 million was offset by $446 million of investing cash use, including $332 million for the Penford acquisition and $128 million of capital expenditures. Financing provided $301 million, including $489 million of borrowing proceeds. Cash increased $77 million to $657 million.
- Management expected approximately $300 million of 2015 capital expenditures and approximately $12 million of pension contributions. It stated that cash, operating cash flow, debt-market access, and credit facilities should provide sufficient liquidity for the foreseeable future. Approximately $645 million of cash and short-term investments was held outside the United States.
Acquisitions, unusual items, and other developments
- Ingredion acquired Penford for $332 million, including the extinguishment of $93 million of Penford debt. The preliminary allocation included $116 million of goodwill and $124 million of identifiable intangible assets; valuation remained in progress. Q2 results included $4 million of acquisition and integration costs and $3 million of acquired-inventory fair-value charges. First-half results also included a $10 million restructuring charge, $8 million of acquisition and integration costs, and $6 million of inventory fair-value charges.
- On July 8, 2015, the company announced an agreement to acquire Kerr Concentrates for approximately $100 million in cash, with closing expected in Q3, subject to customary conditions. On July 7, it agreed to sell its Port Colborne, Ontario manufacturing assets for approximately $30 million, with closing expected in Q4 and no significant gain or loss anticipated.
- On July 10, Ingredion established an 18-month, $350 million unsecured term loan facility and used proceeds to repay revolving-credit borrowings. The facility has variable-rate borrowing and leverage and interest-coverage covenants. A $350 million note maturity was due November 1, 2015; the company said it had the ability and intent to refinance it on a long-term basis.
- Other expense included recognition of a contingent liability relating to a legal matter. The filing does not provide a clear amount for that liability. The company also reported a $2.7 million Q2 and $4.6 million first-half unfavorable tax impact from the Mexican peso’s decline; effective tax rates were 30.3% and 30.9%, respectively.
Outlook, risks, and contingencies
Management expected North America to drive the remainder of 2015 operating-income and bottom-line growth, citing stronger volumes and improved mix. It anticipated modest Asia Pacific operating-income improvement, EMEA decline due to currency headwinds, and South America results broadly in line with 2014, with Andean strength offsetting softness in Brazil and the Southern Cone. No specific full-year earnings or EPS guidance was provided in the filing text.
Management warned that difficult South American economic conditions could persist and that strategic actions to optimize the business could result in future asset impairment charges. Key exposures include foreign exchange, corn and energy prices, commodity hedging, demand and pricing, and acquisition integration and synergy execution. The company identified the pending high-fructose-corn-syrup-related litigation as a contingency: summary judgment motions were denied, trial was scheduled for November 2015, and plaintiffs sought injunctive relief and unspecified damages. Ingredion said it intended to defend the case and pursue its counterclaim.
Important facts for investors to verify
- How much of North America’s earnings improvement is sustainable organic growth versus Penford contributions, lower input costs, and weather-related insurance recoveries.
- Final Penford purchase-price allocation, integration progress, realized synergies, and any further restructuring or acquisition costs.
- Debt refinancing and covenant capacity, including the November 2015 note maturity and variable-rate exposure under the new term loan.
- Currency and operating trends in South America and EMEA, including any resulting impairment charges.
- Developments and potential exposure in the pending litigation, and the final outcomes of the Kerr acquisition and Port Colborne sale.