Ingredion Incorporated — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Ingredion supplies starches, sweeteners and other ingredient solutions through four geographic segments: North America, South America, Asia-Pacific and EMEA. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1.762 billion | $1.349 billion | $3.376 billion | $2.892 billion |
| Gross profit | $367 million | $271 million | $718 million | $594 million |
| Operating income | $222 million | $113 million | $52 million | $266 million |
| Net income (loss) attributable to Ingredion | $178 million | $66 million | $(68) million | $141 million |
| Diluted EPS | $2.62 | $0.98 | $(1.01) | $2.08 |
| Operating cash flow | Not provided separately | Not provided separately | $129 million | $294 million |
- Q2 sales rose 31% year over year; management attributed growth to volume recovery, specialty-product growth, acquisitions and favorable price mix, including pass-through of higher corn costs. Gross margin was 21%, versus 20% a year earlier. Operating expenses increased 14% to $167 million, but declined to 9% of sales from 11%.
- Q2 operating income increased 96% and attributable net income increased 170%. Management said the comparison benefited from recovery from COVID-related shutdowns that had reduced volumes in Q2 2020.
- First-half sales increased 17%, while gross margin remained 21%. The first-half net loss and lower operating income primarily reflect a $360 million impairment related to assets designated for contribution to the Arcor joint venture.
- First-half operating cash flow fell to $129 million from $294 million, mainly due to working-capital changes, including increased inventory and receivables. Investing cash use was $157 million; capital expenditures and mechanical stores purchases were $102 million. Financing activities used $94 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $542 million and short-term investments were $7 million. Current assets were $2.813 billion and current liabilities were $1.101 billion.
- Total debt was $2.201 billion, compared with $2.186 billion at December 31, 2020. This included $2.129 billion of long-term debt and $72 million of short-term borrowings. The $380 million term loan matures March 15, 2022; the company said it intended and was able to refinance it on a long-term basis.
- A new unsecured $1 billion revolving facility, maturing June 30, 2026, replaced the previous facility; no revolving borrowings were outstanding at quarter-end. Ingredion also reported approximately $795 million of unused foreign operating lines of credit and compliance with debt covenants.
- Management expects cash, operating cash generation, available revolver capacity and debt-market access to cover operating and other cash needs for at least the next 12 months. Approximately $534 million of $549 million in cash and short-term investments was held outside the U.S.
Material changes, outlook and notable items
- Arcor joint venture: Ingredion agreed to contribute certain Argentina, Chile and Uruguay operations to a venture that is 51% owned by Grupo Arcor and 49% by Ingredion. The $360 million non-cash impairment included $311 million for cumulative translation losses and $49 million for the write-down of contributed net assets. No corresponding income tax benefit was recorded. The transaction closed August 2, 2021, after quarter-end; the company said it would finalize the closing impact in Q3.
- Acquisitions and investment: Ingredion acquired Germany-based food-texture specialist KaTech on April 1 for $40 million net of cash acquired. It also acquired Verdient in November 2020 and a controlling interest in PureCircle in July 2020. In June 2021, it entered an agreement involving Amyris Reb M technology and a 31% joint-venture interest; the transaction resulted in $8 million of net other income as described in the filing.
- Taxes and other income: Q2’s 11.7% effective tax rate, down from 28.7%, was primarily affected by a $30 million discrete benefit from reversing an accrual for withholding tax. The filing also records a $15 million Brazilian indirect-tax credit in Q2 following a favorable Supreme Court ruling. The first-half effective tax rate was 464.7%, largely because the Arcor impairment generated no corresponding tax benefit.
- Cost savings: Ingredion raised its Cost Smart program savings expectation to $170 million by year-end 2021, from an original $125 million target. No specific full-year revenue, earnings or EPS guidance is stated in the provided filing text.
- Risks and controls: Management cited COVID-19 demand uncertainty, commodity and energy costs, ability to pass input-cost increases through, foreign-exchange and political risks (particularly in South America), competition, acquisitions and integration, and manufacturing and regulatory risks. It reported no material COVID-related supply-chain interruptions in Q2. Disclosure controls were deemed ineffective because of a material weakness in IT general controls concerning user access; remediation was expected by the end of Q3 2021. The company was also in discussions with the U.S. Department of Justice over an environmental matter at its Indianapolis facility, which it said was not material, and reported other ordinary-course claims.
Investor verification priorities
- Confirm the final Q3 accounting and cash proceeds for the Arcor transaction, including any adjustment to the $360 million impairment and the treatment of cumulative translation losses.
- Assess whether the Q2 volume recovery, pricing and margin improvements continued, and whether input-cost inflation was passed through without margin pressure.
- Monitor working-capital trends and operating cash conversion after the first-half decline, as well as debt refinancing plans for the $380 million term loan due in March 2022.
- Track delivery of the $170 million Cost Smart savings target and integration results from KaTech, PureCircle and Verdient.
- Verify remediation of the IT access-control material weakness and review subsequent disclosure-control assessments.