Corn Products International, Inc. (now Ingredion) — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. The filing is under Corn Products International, Inc.; it reports that the National Starch acquisition closed October 1, after quarter-end, so the acquired business is not included in these results.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,019.5 million | $970.6 million | $2,959.8 million | $2,713.4 million |
| Gross profit | $171.6 million | $153.3 million | $478.2 million | $357.8 million |
| Operating income | $88.6 million | $87.8 million | $236.9 million | $53.7 million |
| Net income (loss) attributable to CPI | $36.9 million | $52.8 million | $117.2 million | $(15.2) million |
| Diluted earnings (loss) per share | $0.48 | $0.70 | $1.53 | $(0.20) |
- Gross margin increased to 16.8% in Q3 from 15.8%; for the nine-month period it was 16.2%, versus 13.2%.
- Q3 sales rose 5%, reflecting 9% higher volume and 3% favorable currency translation, partly offset by a 7% decline in price/product mix. Nine-month sales rose 9%, with higher volume and favorable currency more than offsetting lower price/product mix.
- Q3 attributable earnings declined despite slightly higher operating income, principally because of acquisition-related and financing costs and Chile impairment/restructuring costs. Management said adjusted net income would have increased 18% for Q3 and 76% for the first nine months, excluding specified financing, acquisition, impairment and restructuring charges.
- Regional Q3 sales were $577.8 million in North America, $309.6 million in South America and $132.1 million in Asia/Africa. Asia/Africa operating income rose to $12.5 million from $3.7 million; South America operating income declined to $35.7 million from $37.3 million.
Cash, debt and liquidity
- Operating cash flow for the first nine months was $325 million, down from $368 million. Capital expenditures were $90 million; management expected approximately $150 million for full-year 2010.
- At September 30, cash was $1.587 billion, current assets $2.516 billion and current liabilities $570 million. The substantial cash balance was raised principally to fund the National Starch purchase completed the next day.
- Total debt was approximately $1.775 billion, versus $544 million at December 31, 2009. It included $300 million drawn on a new $1 billion revolving credit facility and $900 million of notes issued for the acquisition. The filing reports a 5.5% weighted-average interest rate for the first nine months, excluding the bridge-loan fee charge.
- The company also reported approximately $443 million of unused foreign operating credit lines. Management expected operating cash flow and borrowing availability to cover anticipated capital expenditures, dividends and other needs for the foreseeable future.
Material developments, outlook and risks
- On October 1, 2010, the company acquired 100% of National Starch for $1.3 billion cash, subject to post-closing adjustments, funded principally through borrowings. National Starch reported 2009 sales of $1.2 billion. Purchase accounting valuations and pro forma historical information were not yet complete.
- Management cited improved volumes, plant utilization, lower corn costs and stronger currencies, and said it expected improved full-year 2010 sales and earnings versus 2009. No specific earnings or revenue guidance was provided.
- Q3 included $20 million of bridge financing costs, $10.5 million of acquisition costs in operating results and $3.2 million of impairment/restructuring charges. The nine-month period included $24 million of Chile-related charges; the prior-year period included $125 million of impairment/restructuring charges, principally a South Korea goodwill write-off.
- A 2010 arbitration correction awarded the company $58.4 million plus accrued interest in its dispute over Mexico’s former HFCS beverage tax. The award had not been recorded; Mexico challenged the correction, and consolidated set-aside proceedings were scheduled for March 2011.
- Key exposures include corn and natural-gas prices, foreign exchange and interest rates; the company uses derivatives to hedge certain exposures. Management also identified risks involving economic conditions, customer demand and pricing, competition, operating interruptions, weather, energy and shipping costs, and integration of National Starch.
Investor verification checklist
- Confirm the final National Starch purchase price allocation, acquired liabilities, goodwill and expected depreciation or amortization.
- Track post-acquisition debt, interest expense, cash generation and compliance with leverage and interest-coverage covenants.
- Reconcile reported results with management’s adjusted growth figures and the disclosed acquisition, bridge-financing and Chile charges.
- Follow the Mexico arbitration challenge and any eventual recognition or collection of the unrecorded award.
- Assess whether volume growth and margin improvement persist if corn costs, selling prices, currencies or regional demand change.