Ingredion Incorporated — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; dollar amounts in millions except per-share data. Ingredion produces starches and sweeteners for food, beverage, industrial and other markets, operating across North America, South America, Asia-Pacific and EMEA.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,457 | $1,450 | $4,311 | $4,415 |
| Gross profit | $344 | $334 | $989 | $1,048 |
| Operating income | $165 | $155 | $494 | $545 |
| Net income attributable to Ingredion | $99 | $95 | $304 | $349 |
| Diluted EPS | $1.47 | $1.32 | $4.51 | $4.80 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $490 | $579 |
| Capital expenditures and mechanical stores purchases | Not provided for quarter | Not provided for quarter | $231 | $234 |
Q3 gross margin improved to 24% from 23%; nine-month gross margin declined to 23% from 24%. Q3 sales were nearly flat, while nine-month sales declined 2%. Q3 operating income and attributable earnings rose 6% and 4%, respectively; nine-month operating income fell 9% and attributable earnings fell 13%.
At September 30, cash and cash equivalents were $443, short-term investments $3, and total debt $2,082 ($2,001 long-term and $81 short-term). Current assets were $2,342 and current liabilities $957. The company reported approximately $850 of unused revolver availability and $565 of unused foreign operating lines; it was in compliance with credit-facility covenants. Weighted-average borrowing cost was 4.4% for the nine-month period. Management said available cash, operating cash flow, debt-market access and borrowing capacity should fund anticipated needs for the foreseeable future.
Material changes and operating drivers
- Q3: Management attributed improved earnings to favorable price/product mix and specialty volume, partly offset by foreign-exchange effects and higher raw-material costs. North America operating income rose to $145 from $138; South America to $27 from $22. Asia-Pacific fell to $22 from $25 and EMEA to $24 from $26.
- Nine months: Lower sales reflected foreign-exchange impacts and planned Stockton HFCS and industrial-starch volume reductions, partly offset by pricing. Margin pressure reflected foreign exchange and higher raw-material and production costs. Operating income declined in all four segments: North America $409 versus $431; South America $61 versus $68; Asia-Pacific $65 versus $75; EMEA $71 versus $86.
- Operating cash flow declined $89 year over year, primarily due to lower earnings and working-capital movements. A $77 currency-hedge settlement overpayment received September 30 was remitted to the counterparty on October 1 and is expected to reduce fourth-quarter operating cash flow.
- Debt totaled $2,082 versus $2,100 at year-end 2018. In April, Ingredion replaced a $165 term loan with a $500, 24-month unsecured facility maturing April 2021, using proceeds to repay the old loan and reduce revolver borrowings. Management intends to refinance $200 of 5.62% notes due March 2020 on a long-term basis.
Outlook, risks and unusual items
- Management expected operating income to be down in each region under then-current conditions: North America faced late planting, delayed harvest and corn/co-product inventory imbalances; South America faced macroeconomic uncertainty; Asia-Pacific faced currency weakness, higher input costs, slower demand and price competition; EMEA faced currency effects, higher raw-material costs and Brexit-related postponements.
- Expected 2019 capital expenditures and mechanical-stores purchases were approximately $335–$355. The filing gives qualitative regional outlook, not a numerical full-year earnings or EPS forecast.
- Restructuring and impairment charges were $28 in Q3 and $41 year to date. The company expected further Cost Smart SG&A charges and additional Lane Cove closure costs of about $10 in the remainder of 2019 and $10–$12 in 2020. A $15 severance accrual remained, with $14 expected to be paid within 12 months.
- Ingredion acquired Western Polymer, a potato-starch producer, on March 1 for $42 net of cash acquired. Preliminary purchase accounting recorded $13 of goodwill and intangibles and $29 of net tangible assets; valuations remained subject to finalization.
- A Brazilian subsidiary received a favorable court decision concerning historical indirect-tax credits. The amount and timing remained uncertain pending complex calculations and further court decisions; a one-time tax payment would become due when the credits and interest are recorded.
- The company disclosed suspicious activity affecting certain data-center servers. It reported no known evidence of improper access to customer, supplier or employee data and no anticipated material impact to key financial metrics, but said some transactions could be delayed while systems were restored.
- Other risk exposures include commodity prices, foreign exchange, interest rates, trade disputes, weather and raw-material availability. Thailand administrative fines of approximately $107,000 were paid; the company did not expect known legal matters to be material, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether regional weakness and the expectation of lower operating income in all segments persisted beyond the filing date.
- The fourth-quarter cash-flow impact of the $77 hedge-settlement overpayment repayment and the underlying working-capital trend.
- Final Western Polymer purchase-price allocation and integration performance.
- Actual restructuring charges and cash costs, particularly for Cost Smart and the Lane Cove closure.
- Final amount, timing and tax treatment of the Brazilian tax credits, and any subsequent developments in the cybersecurity incident.
- Progress in refinancing the $200 of notes due March 2020 and continued compliance with debt covenants.