Ingredion Incorporated — Q2 2020 Form 10-Q
Business context and period. Ingredion produces starches, sweeteners and other ingredients for food, beverage, brewing, animal nutrition and industrial customers. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the same 2019 periods. Results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,349 million | $1,550 million | $2,892 million | $3,086 million |
| Gross profit / margin | $271 million / 20% | $329 million / 21% | $594 million / 21% | $645 million / 21% |
| Operating income | $113 million | $168 million | $266 million | $329 million |
| Net income attributable to Ingredion | $66 million | $105 million | $141 million | $205 million |
| Diluted EPS | $0.98 | $1.56 | $2.08 | $3.04 |
| Operating cash flow | Not provided for the quarter in the filing text | $294 million | $253 million |
Liquidity and debt at June 30, 2020: Cash and cash equivalents were $1.047 billion; current assets were $2.820 billion and current liabilities $1.282 billion. Total debt was $2.610 billion, comprising $2.140 billion long-term and $470 million short-term debt, versus $1.848 billion total debt at December 31, 2019. The company reported approximately $1.0 billion of availability under its revolving credit facility and $660 million of unused foreign operating lines, and said it expected available cash, borrowing capacity, operating cash flow and debt-market access to meet needs for at least 12 months. It was in compliance with its financial covenants.
For the first half, capital expenditures and mechanical stores purchases were $175 million; dividends paid, including to non-controlling interests, were $87 million. Cash and cash equivalents rose from $264 million at year-end 2019 to $1.047 billion, principally reflecting net borrowing and financing activity.
Material changes versus the prior comparable periods
- Q2 sales fell 13%, operating income 33%, and Ingredion-attributable net income 37% year over year. Management attributed weaker results chiefly to COVID-19-related volume declines, particularly in the Americas, and higher Cost Smart restructuring charges.
- First-half sales declined 6%, operating income 19%, and attributable net income 31%. Gross margin was 21%, unchanged from the prior-year first half; Q2 margin declined from 21% to 20% as fixed costs were less absorbed and COVID-related costs increased.
- Q2 sales declined in each region: North America 13%, South America 19%, Asia-Pacific 8%, and EMEA 8%. North American operating income fell 27%; South America, Asia-Pacific and EMEA operating income also decreased modestly.
- First-half operating cash flow increased to $294 million from $253 million, driven by working-capital changes, partly offset by lower net income.
- Cash restructuring and impairment charges were $25 million pretax in the first half, versus $13 million in the prior-year period. The company recorded $19 million of after-tax net restructuring costs in first-half 2020.
Outlook, management commentary, risks and unusual items
- COVID-19 outlook: Facilities continued operating as essential businesses, with no material supply-chain interruptions reported in Q2. Management anticipated continued adverse sales impacts across segments in the second half of 2020, with recovery dependent on easing restrictions and increased consumer mobility. It expected away-from-home demand to remain depressed and at-home food demand elevated. The filing provides no numerical earnings or sales guidance.
- Restructuring: Cost Smart includes cost-of-sales and SG&A initiatives, including closure of the Lane Cove, Australia facility. Management expected a further $2 million of restructuring costs during the remainder of 2020 related to that closure. Certain Stockton, California and Lane Cove assets, totaling $13 million, were classified as held for sale without a recorded gain or loss.
- Debt actions: Ingredion issued $1.0 billion principal amount of senior notes in Q2, with maturities in 2030 and 2050, and used net proceeds to repay $394 million drawn on its revolving facility and set aside funds for the $400 million notes due November 2020. Those notes were redeemed July 9, 2020 for $409 million, including accrued interest and a make-whole premium. The company said it intended to refinance its $405 million term loan due April 2021 on a long-term basis.
- Tax and currency: The first-half effective tax rate was 37.0%, versus 28.2% a year earlier. Peso depreciation contributed to a $22 million discrete tax expense in 2020, compared with a $1 million discrete tax benefit in 2019. Foreign-exchange movements also affected sales, earnings and comprehensive income.
- Acquisition: On July 1, 2020, Ingredion completed its acquisition of PureCircle for $222 million cash. Ingredion owns 75% of the entity; former PureCircle shareholders own 25%. PureCircle will be consolidated.
- Other risks and contingencies: The filing identifies pandemic effects, demand and customer-industry trends, commodity and energy costs, currency and interest-rate movements, supply availability, operational disruptions, and acquisition integration among risks. Ingredion said known legal proceedings and inquiries were not expected to be material, while noting outcomes cannot be assured.
Important facts for investors to verify
- Whether COVID-related volume and away-from-home demand recover as management anticipated, and how price/mix and fixed-cost absorption evolve.
- Post-quarter redemption of the 2020 notes, refinancing plans for the 2021 term loan, and the effect of higher reported debt on interest expense and leverage.
- PureCircle’s integration, consolidated results, cash requirements and the implications of the 25% non-controlling interest.
- Whether Cost Smart savings offset restructuring costs, and whether the expected additional Lane Cove costs remain near the disclosed estimate.
- The persistence and cash/tax effects of Mexican peso movements and other foreign-exchange exposures.