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INGR > SEC Filings for INGR > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for INGREDION INC


2-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a major supplier of high-quality food ingredients, industrial products and specialty starches to customers around the world. We have 36 manufacturing plants located throughout North America, South America, Asia Pacific and Europe, the Middle East and Africa ("EMEA"), and we manage and operate our businesses at a regional level. We believe this approach provides us with a unique understanding of the cultures and product requirements in each of the geographic markets in which we operate, bringing added value to our customers. Our sweeteners are found in products such as baked goods, candies, chewing gum, dairy products and ice cream, soft drinks and beer. Our starches are a staple of the food, paper, textile, beer and corrugating industries.

Third quarter 2012 was a strong period for us as we achieved company record highs for third quarter net sales, operating income, net income and diluted earnings per common share. Higher product selling prices and volume growth were the primary drivers of this record performance. Despite challenging macroeconomic conditions, we achieved sales volume growth and product price improvements to cover higher raw material costs and foreign currency headwinds. Additionally, we further enhanced our liquidity and financial flexibility by selling $300 million of 1.80 percent five-year Senior Notes in September and recently entering into a new five-year $1 billion revolving credit agreement. We are positioned well for the fourth quarter and currently anticipate a strong full year 2012.

We currently expect that our future cash flow from operations and borrowing availability under our credit facilities will provide us with sufficient liquidity to fund our anticipated capital expenditures, dividends, and other investing and/or financing strategies for the foreseeable future.


Results of Operations

We have significant operations in North America, South America, Asia Pacific and EMEA. For most of our foreign subsidiaries, the local foreign currency is the functional currency. Accordingly, revenues and expenses denominated in the functional currencies of these subsidiaries are translated into US dollars at the applicable average exchange rates for the period. Fluctuations in foreign currency exchange rates affect the US dollar amounts of our foreign subsidiaries' revenues and expenses. The impact of currency exchange rate changes, where significant, is provided below.

For The Three and Nine Months Ended September 30, 2012

With Comparatives for the Three and Nine Months Ended September 30, 2011

Net Income attributable to Ingredion. Net income for Ingredion for the quarter ended September 30, 2012 increased to $112.7 million, or $1.45 per diluted common share, from $87.7 million, or $1.12 per diluted common share, in the third quarter of 2011. Ingredion net income for the nine months ended September 30, 2012 decreased to $316.0 million, or $4.06 per diluted common share, from $320.7 million, or $4.10 per diluted common share, in the prior year period. The results for the third quarter and first nine months of 2012 include after-tax charges for impaired assets in China and Colombia and plant shut-down costs in Kenya totaling $3 million ($0.04 per diluted common share) and $7 million ($0.09 per diluted common share), respectively. The results for the third quarter and first nine months of 2012 also include after-tax restructuring charges of approximately $2 million ($0.03 per diluted common share) and $7 million ($0.09 per diluted common share), respectively, relating to our manufacturing optimization plan in North America. Additionally, the results for the first nine months of 2012 include after-tax costs of $3 million ($0.03 per diluted common share), associated with our integration of National Starch. Our results for the nine months ended September 30, 2012 also include the reversal of a $13 million valuation allowance that had been recorded against net deferred tax assets of our Korean subsidiary ($0.16 per diluted common share). Our results for the third quarter and first nine months of 2011 included after-tax costs of $4 million ($0.05 per diluted common share) and $14 million ($0.17 per diluted common share), respectively, related to the integration of National Starch and after-tax restructuring charges of $2 million ($0.03 per diluted common share) and $4 million ($0.05 per diluted common share), respectively, relating to our manufacturing optimization plan in North America. Our results for the nine months ended September 30, 2011 also included a $58 million NAFTA award ($0.75 per diluted common share) received from the Government of the United Mexican States (see Note 12 of the Notes to the Condensed Consolidated Financial Statements for additional information).

Without the reversal of the Korean deferred tax asset valuation allowance, the impairment/restructuring charges, the integration costs and the 2011 NAFTA award, net income for the third quarter and first nine months of 2012 would have grown 26 percent and 14 percent, respectively, over the comparable prior year periods, while our diluted earnings per common share would have risen 27 percent and 15 percent, respectively. These increases primarily reflect operating income growth in North America and, to a lesser extent, in Asia Pacific.

Net Sales. Third quarter 2012 net sales totaled $1.68 billion, up 3 percent from third quarter 2011 net sales of $1.63 billion. The increase in net sales reflects a 5 percent price/product mix improvement and 3 percent volume growth which more than offset unfavorable currency translation of 5 percent attributable to weaker foreign currencies.


Co-product sales of $323 million for third quarter 2012 increased approximately 10 percent from $295 million in the prior year period, driven by higher volume and improved selling prices.

North American net sales for third quarter 2012 increased 10 percent to $977 million, from $889 million a year ago. This increase reflects improved price/product mix of 6 percent and volume growth of 4 percent driven by stronger demand from our soft drink and brewing customers. Improved selling prices helped to offset higher corn costs. In South America, third quarter 2012 net sales decreased 12 percent to $363 million from $412 million a year ago, as unfavorable currency translation of 13 percent and a 3 percent volume reduction more than offset a price/product mix improvement of 4 percent. The volume decline primarily reflects a weaker economy in Brazil. Asia Pacific third quarter 2012 net sales increased 11 percent to $215 million from $195 million a year ago. Volume growth of 12 percent driven by stronger demand from our food and beverage customers and price/product mix improvement of 3 percent, more than offset unfavorable currency translation of 4 percent. EMEA net sales for third quarter 2012 declined 6 percent to $124 million from $132 million a year ago, as unfavorable currency translation of 8 percent more than offset a 2 percent price/product mix improvement. Volume in this segment was flat.

Net sales for the nine months ended September 30, 2012 totaled $4.89 billion, up 5 percent from $4.67 billion from the same period a year ago. The increase in net sales reflects a price/product mix improvement of 6 percent and volume growth of 2 percent, which more than offset unfavorable currency translation of 3 percent due to weaker foreign currencies. Co-product sales of $857 million for the first nine months of 2012 increased approximately 3 percent from $836 million in the prior year period, as increased volume and moderately higher selling prices more than offset weaker foreign currencies.

Net sales in North America for the first nine months of 2012 increased 12 percent to $2.82 billion from $2.52 billion a year ago. This increase primarily reflects improved price/product mix of 7 percent and volume growth of 5 percent driven by stronger demand from our soft drink and brewing customers. Improved selling prices helped to offset higher corn costs. In South America, net sales for the first nine months of 2012 decreased 8 percent to $1.08 billion from $1.17 billion in the prior year period, as a 10 percent decline attributable to weaker foreign currencies and a 3 percent volume reduction, more than offset a 5 percent price/product mix improvement. The volume decline primarily reflects a combination of weaker economic activity in the segment and a transportation strike and labor issues that impacted our customers in Argentina. Net sales in Asia Pacific for the first nine months of 2012 grew 6 percent to $613 million from $578 million a year ago, as volume growth of 5 percent and price/product mix improvement of 3 percent, more than offset unfavorable currency translation of 2 percent. EMEA net sales for the first nine months of 2012 decreased 6 percent to $378 million from $403 million a year ago, as unfavorable currency translation of 7 percent and a 3 percent volume reduction attributable to a weak European economy and energy shortages in Pakistan, more than offset a 4 percent price/product mix improvement.

Cost of Sales and Operating Expenses. Cost of sales of $1.37 billion for the third quarter of 2012 increased 1 percent from $1.35 billion in the prior year period. Cost of sales of $3.98 billion for the first nine months of 2012 increased 4 percent from $3.83 billion a year ago. These increases primarily reflect higher corn costs and volume growth. Currency translation caused cost of sales for the third quarter and first nine months of 2012 to decrease approximately 5 percent and 4 percent, respectively, from the year ago periods, reflecting the impact of weaker foreign currencies. Gross corn costs for the third quarter and first nine months


of 2012 increased approximately 3 percent and 6 percent, respectively, from the comparable prior year periods, driven by higher market prices for corn. Our gross profit margin for the third quarter and first nine months of 2012 was 18.7 percent and 18.5 percent, respectively, compared to 17.0 percent and 18.1 percent in the prior year periods.

Operating expenses for the third quarter and first nine months of 2012 increased to $137 million and $405 million, respectively, from $131 million and $400 million last year. These increases primarily reflect higher compensation related costs. Lower integration expenses and the impact of weaker foreign currencies partially offset these increases. Currency translation associated with the weaker foreign currencies caused operating expenses for the third quarter and first nine months of 2012 to decrease approximately 5 percent and 3 percent, respectively, from the prior year periods. Operating expenses, as a percentage of net sales, were 8.2 percent and 8.3 percent for the third quarter and first nine months of 2012, respectively, compared to 8.1 percent and 8.6 percent in the prior year periods. Without the integration costs, operating expenses, as a percentage of net sales, would have been 8.1 percent and 8.2 percent for the third quarter and first nine months of 2012, respectively, up from 7.7 percent and 8.1 percent in the comparable prior year periods.

Operating Income. Third quarter 2012 operating income increased 19 percent to $169 million from $142 million a year ago. The current year period includes restructuring charges of $5 million for impaired assets in China and Colombia and $1 million of plant shut-down costs in Kenya, $4 million of restructuring charges to reduce the carrying value of certain equipment in connection with our manufacturing optimization plan in North America and $0.6 million of costs pertaining to the integration of National Starch. Third quarter 2011 operating income included $5 million of costs pertaining to the integration of National Starch and a $4 million restructuring charge associated with our North American manufacturing optimization plan. Without the impairment/restructuring charges and integration costs, operating income for the third quarter of 2012 would have increased 18 percent to $179 million from $151 million a year ago. This increase was driven by strong earnings growth in North America and, to a lesser extent, in Asia Pacific. Unfavorable currency translation due to weaker foreign currencies reduced operating income by approximately $10 million from the prior year period. North America operating income for third quarter 2012 increased 33 percent to $102.5 million from $77.3 million a year ago. The increase was driven principally by improved product selling prices and volume growth, which more than offset higher corn costs. Currency translation associated with the weaker Canadian dollar was only slightly unfavorable in the region. South America operating income for third quarter 2012 decreased 2 percent to $46.7 million from $47.6 million a year ago. This decline reflects lower earnings in the Southern Cone of South America and Brazil principally driven by soft demand and currency weakness. Translation effects associated with weaker South American currencies (particularly the Brazilian Real and the Argentine Peso) caused operating income to decrease by approximately $7 million. Asia Pacific operating income for third quarter 2012 increased 43 percent to $28.6 million from $20.0 million a year ago, primarily driven by higher sales volume and improved price/product mix, which more than offset the impact of weaker currencies. Unfavorable translation effects associated with weaker foreign currencies caused Asia Pacific operating income to decrease by approximately $1 million. EMEA operating income decreased 9 percent to $19.5 million from $21.5 million a year ago primarily reflecting foreign currency weakness. Unfavorable translation effects associated with weaker foreign currencies caused EMEA operating income to decrease by approximately $2 million.


Operating income for the nine months ended September 30, 2012 was $483 million, down 4 percent from $505 million a year ago. The current year period includes $11 million of charges for impaired assets and restructuring costs in Kenya, $5 million of charges for impaired assets in China and Colombia, $11 million of restructuring charges to reduce the carrying value of certain equipment in connection with our manufacturing optimization plan in North America and $4 million of costs pertaining to the integration of National Starch. Operating income for the nine months ended September 30, 2011 included the $58 million NAFTA award, $20 million of costs pertaining to the integration of National Starch and $6 million of restructuring charges related to our North American manufacturing optimization plan. Without the impairment/restructuring charges, integration costs and the 2011 NAFTA award, operating income for the first nine months of 2012 would have increased 9 percent to $514 million from $473 million a year ago, primarily reflecting strong earnings growth in North America and, to a lesser extent, in Asia Pacific. Unfavorable currency translation associated with weaker foreign currencies caused operating income to decline by approximately $23 million from the prior year period. North America operating income for the first nine months of 2012 increased 21 percent to $299.3 million from $248.0 million a year ago. Improved product selling prices and volume growth helped to offset higher corn costs. Currency translation associated with a weaker Canadian dollar caused operating income to decrease by approximately $2 million in North America. South America operating income for the first nine months 2012 declined 3 percent to $139.7 million from $144.5 million a year ago. The decrease primarily reflects lower earnings in Brazil principally driven by softer demand from a weaker economy and currency weakness, which more than offset improved earnings in the Southern Cone and Andean regions of South America. Translation effects associated with weaker South American currencies (particularly the Argentine Peso and the Brazilian Real) caused operating income to decrease by approximately $15 million in the segment. Asia Pacific operating income for the first nine months of 2012 increased 16 percent to $71.8 million from $61.7 million a year ago, primarily reflecting sales volume growth and improved price/mix, which more than offset the impact of weaker currencies and higher manufacturing costs. Unfavorable translation effects associated with weaker foreign currencies caused Asia Pacific operating income to decrease by approximately $2 million. EMEA operating income decreased 12 percent to $57.1 million from $65.2 million a year ago. The decline primarily reflects softer demand attributable to difficult economic conditions, higher energy costs and weaker foreign currencies. Translation effects associated with weaker foreign currencies caused EMEA operating income to decrease by approximately $4 million.

Financing Costs-net. Financing costs for the third quarter and first nine months of 2012 were $16 million and $53 million, respectively, as compared to $13 million and $58 million in the comparable prior year periods. The increase in the current quarter primarily reflects a swing in foreign currency transaction losses, partially offset by an increase in interest income attributable to our higher cash balances and lower interest expense on our outstanding debt. Our foreign currency transaction losses were insignificant for third quarter 2012, as compared to the prior year period, when we had $5 million of foreign currency transaction gains. The decrease in financing costs for the first nine months of 2012 primarily reflects an increase in interest income attributable to our higher cash balances, a decrease in interest expense driven by lower borrowing rates and a reduction in foreign currency transaction losses.

Provision for Income Taxes. Our effective income tax rate was 25.5 percent for both the third quarter and first nine months of 2012, as compared to 31.0 percent and 27.0 percent in the comparable prior year periods.


In the third quarter of 2012, we recognized approximately $4 million of previously unrecognized tax benefits as a result of a lapse of the statute of limitations. We also took actions related to the previously announced Kenya restructuring that produced additional tax benefits of approximately $3 million in the quarter. Additionally, we recorded a $4 million impairment charge related to our non wholly-owned consolidated subsidiary in China, which is not expected to produce a realizable tax benefit.

The effective income tax rate for the nine months ended September 30, 2012 also reflects the effects of the reversal of a $13 million valuation allowance that had been recorded against net deferred tax assets of our Korean subsidiary and the recognition of an income tax benefit of $6 million related to the second quarter 2012 pre-tax charge of $10 million in Kenya and the associated tax write-off of the investment.

Without these items, the effective income tax rates for third quarter and first nine months of 2012 would have been approximately 29 percent and 31 percent, respectively. Our effective income tax rate for the first nine months of 2011 was favorably impacted by the recognition of the $58 million nontaxable NAFTA settlement and would have otherwise been approximately 31 percent.

Net Income Attributable to Non-controlling Interests. Net income attributable to non-controlling interests for the third quarter and first nine months of 2012 was $1 million and $4 million, respectively, as compared to $2 million and $5 million in the comparable prior year periods. These decreases primarily reflect lower earnings at our non wholly-owned operations in Pakistan and China.

Comprehensive Income Attributable to Ingredion. We recorded comprehensive income of $195 million for the third quarter of 2012, as compared to a comprehensive loss of $155 million in the prior year period. The increase primarily reflects a favorable variance in the currency translation adjustment, gains on cash flow hedges and, to a lesser extent, our net income growth. The favorable variances in the currency translation adjustment reflect a moderate strengthening in end of period foreign currencies relative to the US dollar in the third quarter of 2012, as compared to a year ago, when end of period foreign currencies had significantly weakened. For the first nine months of 2012, we recorded comprehensive income of $376 million, as compared with $150 million a year ago. The increase primarily reflects gains on cash flow hedges and a favorable variance in the currency translation adjustment. The favorable variances in the currency translation adjustment reflect a more moderate weakening in end of period foreign currencies relative to the US dollar in 2012, as compared to a year ago, when end of period foreign currency depreciation was more significant.

Liquidity and Capital Resources

Cash provided by operating activities for the first nine months of 2012 increased to $563 million from $147 million a year ago. The increase in operating cash flow primarily reflects an improvement in working capital, as compared to the prior year period. The year-over-year improvement in working capital was driven principally by a reduction in inventories, a decrease in accounts receivable and a decrease in our margin accounts relating to commodity hedging contracts. Capital expenditures of $202 million for the first nine months of 2012 are in line with our capital spending plan for the year. We anticipate that our capital expenditures will be approximately $300 million for full year 2012.


On September 20, 2012, we sold $300 million of 1.80 percent Senior Notes due September 25, 2017 (the "Notes"). The Notes rank equally with our other senior unsecured debt. Interest on the Notes is required to be paid semi-annually on March 25th and September 25th, beginning in March 2013. We have the option to prepay the Notes at 100 percent of the principal amount plus interest up to the prepayment date and, in certain circumstances, a make-whole amount. The net proceeds from the sale of the Notes of approximately $297 million were used to repay $205 million of borrowings under our previously existing $1 billion revolving credit facility (see discussion below) and for general corporate purposes. We paid debt issuance costs of approximately $2 million relating to the Notes, which are being amortized to interest expense over the life of the Notes.

On October 22, 2012, we entered into a new five-year, senior unsecured $1 billion revolving credit agreement (the "Revolving Credit Agreement"). The Revolving Credit Agreement replaced our previously existing $1 billion senior unsecured revolving credit facility. We anticipate that we will pay fees of approximately $3 million relating to the new credit facility, which will be amortized to interest expense over the term of the facility.

Subject to certain terms and conditions, we may increase the amount of the revolving facility under the Revolving Credit Agreement by up to $250 million in the aggregate. All committed pro rata borrowings under the revolving facility will bear interest at a variable annual rate based on the LIBOR or prime rate, at our election, subject to the terms and conditions thereof, plus, in each case, an applicable margin based on our leverage ratio (as reported in the financial statements delivered pursuant to the Revolving Credit Agreement).

The Revolving Credit Agreement contains customary representations, warranties, covenants, events of default, terms and conditions, including limitations on liens, incurrence of debt, mergers and significant asset dispositions. We must also comply with a leverage ratio and an interest coverage ratio covenant. The occurrence of an event of default under the Revolving Credit Agreement could result in all loans and other obligations under the agreement being declared due and payable and the revolving credit facility being terminated.

We had no borrowings outstanding under our previously existing $1 billion revolving credit facility at September 30, 2012. In addition to borrowing availability under our Revolving Credit Agreement, we have approximately $533 million of unused operating lines of credit in the various foreign countries in which we operate.

At September 30, 2012, we had total debt outstanding of $1.77 billion, as compared to $1.95 billion at December 31, 2011. The debt includes $350 million of 3.2 percent notes due 2015, $300 million (principal amount) of 1.8 percent senior notes due 2017, $200 million of 6.0 percent senior notes due 2017, $200 million of 5.62 percent senior notes due 2020, $400 million (principal amount) of 4.625 percent notes due 2020, $250 million (principal amount) of 6.625 percent senior notes due 2037 and $45 million of consolidated subsidiary debt consisting of local country short-term borrowings. The weighted average interest rate on our total indebtedness was approximately 4.5 percent for the first nine months of 2012, down from 4.9 percent in the comparable prior year period.

On September 20, 2012, our board of directors declared a quarterly cash dividend of $0.26 per share of common stock, a 30 percent increase from the previous quarterly dividend of $0.20 per share. This dividend was paid on October 25, 2012 to stockholders of record at the close of business on October 3, 2012.


We currently expect that our future cash flow from operations and borrowing availability under our credit facilities will provide us with sufficient liquidity to fund our anticipated capital expenditures, dividends, and other investing and/or financing strategies for the foreseeable future.

We have not provided federal and state income taxes on accumulated undistributed earnings of certain foreign subsidiaries because these earnings have been permanently reinvested. Approximately $392 million of our cash and cash equivalents as of September 30, 2012 was held by our operations outside of the United States. We expect that available cash balances and credit facilities in the United States, along with cash generated from operations, will be sufficient to meet our operating and cash needs for the foreseeable future, without requiring us to repatriate earnings from our foreign subsidiaries. It is not practicable to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings.

Hedging

We are exposed to market risk stemming from changes in commodity prices, foreign currency exchange rates and interest rates. In the normal course of business, we actively manage our exposure to these market risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities. These transactions utilize exchange traded derivatives or over-the-counter derivatives with investment grade counterparties. Our hedging transactions include but are not limited to a variety of derivative financial instruments such as commodity futures, options and swap contracts, forward currency contracts and options, interest rate swap agreements and treasury lock agreements. See Note 5 of the Notes to the Condensed Consolidated Financial Statements for additional information.

Commodity Price Risk:

We use derivatives to manage price risk related to purchases of corn and natural gas used in our manufacturing processes. We periodically enter into futures, options and swap contracts for a portion of our anticipated corn and natural gas usage, generally over the following twelve to eighteen months, in order to hedge price risk associated with fluctuations in market prices. These derivative instruments are recognized at fair value and have effectively reduced our . . .

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