Ingredion Incorporated — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. The company changed its name from Corn Products International to Ingredion in May 2012.
Business context
Ingredion manufactures starches, sweeteners, specialty ingredients, animal-feed products and edible corn oil, primarily by processing corn and other starch-based materials. It operates 36 manufacturing facilities and reports four geographic segments. North America generated 57% of 2012 sales, South America 22%, Asia Pacific 13% and EMEA 8%. No customer accounted for 10% or more of sales.
Key financial metrics
| Metric | 2012 | 2011 | Change or context |
|---|---|---|---|
| Net sales | $6.532 billion | $6.219 billion | Up 5% |
| Gross profit | $1.238 billion | $1.126 billion | Up 10%; gross margin about 19% versus 18% |
| Operating income | $668 million | $671 million | Down slightly; includes differing unusual items in each year |
| Net income attributable to Ingredion | $428 million | $416 million | Up 3% |
| Diluted EPS | $5.47 | $5.32 | Up 3% |
| Cash provided by operations | $732 million | $300 million | Improved mainly through working-capital management |
| Capital expenditures | $313 million | $263 million | 2013 estimate: $350–$400 million |
| Total debt | $1.800 billion | $1.949 billion | Long-term debt was $1.724 billion |
| Cash and cash equivalents | $609 million | $401 million | Plus $19 million of short-term investments |
| Working capital | $1.427 billion | $1.176 billion | Reported balance-sheet measure |
Net debt, as defined by the company, was $1.172 billion, compared with $1.548 billion in 2011. The company reported a 1.3x net-debt-to-adjusted-EBITDA ratio, down from 1.9x, and a 30.8% net-debt-to-capitalization ratio, down from 39.7%. The $1 billion revolving credit facility had no borrowings outstanding at year-end; the company also reported approximately $503 million of unused foreign operating lines of credit.
Fourth quarter: Net sales were $1.644 billion versus $1.548 billion in Q4 2011; gross profit was $333 million versus $280 million; net income attributable to Ingredion was $112 million versus $95 million; and diluted EPS was $1.42 versus $1.22.
Material changes versus the prior period
- Full-year sales growth reflected 6% improvement in price/product mix and 2% volume growth, partly offset by 3% unfavorable currency translation. Cost of sales rose 4%, including approximately 4% higher gross corn cost per ton.
- North America sales rose 11% and operating income rose 27%, supported by pricing and volume. Asia Pacific sales rose 7% and operating income rose 20%.
- South America sales fell 7%, including weaker currencies and a 3% volume decline; operating income fell 2%. EMEA sales fell 3% and operating income fell 7%, primarily reflecting currency effects and the Kenya plant closure.
- Cash from operations increased substantially from 2011, when working-capital changes used $334 million. In 2012, working-capital changes provided $33 million, with improved receivables collection and inventory management and higher accounts payable cited as drivers.
- Ingredion issued $300 million of 1.80% senior notes due 2017 and replaced its prior revolving facility with a new five-year $1 billion facility. Total debt declined year over year.
- Management said that, excluding specified unusual items, 2012 net income and diluted EPS would have grown 19%, and operating income would have increased 12%. These are company-adjusted comparisons, not GAAP results.
Outlook, risks and unusual items
- Management said it expected continued business growth in 2013 and anticipated that operating cash flow and credit capacity would cover expected capital expenditures, dividends and other planned needs. It provided no quantified earnings or sales guidance in the supplied filing text.
- 2012 results included $36 million of restructuring and impairment charges, including costs associated with closing the Kenya plant and North American manufacturing optimization; a $13 million Korean deferred-tax valuation-allowance reversal; a $5 million benefit-plan gain; a $2 million land-sale gain; and $4 million of National Starch integration costs. Management also cited a tax benefit related to the Kenya restructuring.
- The comparison with 2011 is affected by that year’s $58 million NAFTA award and $30 million postretirement-plan gain, as well as integration and restructuring costs. These items materially affect reported year-over-year comparisons.
- Key operating exposures include corn and other raw-material costs, energy prices and supply, foreign-exchange movements, competitive pricing, and the ability to pass cost increases to customers. Raw materials represented 40%–65% of finished-product costs and energy approximately 10%; Pakistan’s energy shortages continued to affect operations and customers.
- A lawsuit brought by sugar companies over statements concerning high-fructose corn syrup remained pending; plaintiffs sought injunctive relief and unspecified damages. Ingredion disputed the claims and was also pursuing a counterclaim. The filing said other ordinary-course claims were not expected to be material, while noting no assurance of that outcome.
- Other matters to monitor include pension assumptions and funding, tax audits and $37 million of unrecognized tax benefits, potential impairment of long-lived assets or goodwill, and the company’s substantial contractual commitments, including energy-supply obligations.
Most important facts for investors to verify
- Whether pricing and product mix continue to offset corn, energy and other input-cost inflation, and how effectively hedges and customer price changes protect margins.
- Whether North America and Asia Pacific growth can continue and whether South America and EMEA stabilize after currency, volume and operating disruptions.
- Whether operating cash flow remains strong as working capital changes, capital spending rises, and pension contributions and dividends are funded.
- The timing and financial outcome of the HFCS litigation, tax matters and any further restructuring or asset impairment.
- Whether 2013 capital expenditures fall within management’s stated $350–$400 million range and whether the company maintains its leverage and liquidity targets.