Ingredion Incorporated — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Ingredion produces starches and sweeteners through four geographic segments: North America, South America, Asia Pacific, and EMEA.
Financial results and liquidity
| Metric (US$ millions, except per-share amounts) | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | 1,496 | 1,457 | 2,965 | 2,910 |
| Gross profit | 360 | 373 | 714 | 724 |
| Operating income | 193 | 210 | 390 | 403 |
| Net income attributable to Ingredion | 114 | 130 | 254 | 254 |
| Diluted EPS | $1.57 | $1.78 | $3.47 | $3.46 |
- Q2 gross margin was 24%, versus 26%; first-half gross margin was 24%, versus 25%. Operating income declined 8% in Q2 and 3% in the first half.
- First-half operating cash flow was $352 million, compared with $302 million. It included $89 million of one-time net tax receipts. Capital expenditures and mechanical-stores purchases were $160 million, implying operating cash flow less these purchases of $192 million.
- Cash and cash equivalents were $359 million at June 30, down from $595 million at December 31, 2017. Total debt was $1.663 billion, down from $1.864 billion; short-term borrowings were $133 million and long-term debt was $1.530 billion. The company reported $485 million of unused foreign operating lines, in addition to revolving-credit availability.
- First-half financing cash outflow was $424 million, including $230 million of term-loan repayments, $141 million of share repurchases, and $92 million of dividends paid. The board declared a quarterly dividend of $0.60 per share, paid July 25, 2018.
Material changes and management commentary
- Sales rose 3% in Q2 and 2% in the first half, but higher costs pressured profit. Management cited North American freight and production costs and lower U.S./Canada sweetener and industrial-starch demand, as well as higher tapioca costs in Thailand.
- Q2 segment operating income: North America $150 million (down $30 million); South America $20 million (up $16 million); Asia Pacific $27 million (down $3 million); EMEA $29 million (unchanged). First-half results showed a similar North America and Asia Pacific decline, offset in part by improvement in South America and EMEA.
- Cost Smart, introduced in Q2, targets $125 million of savings by year-end 2021: $75 million in cost of sales, including freight, and $50 million in SG&A. Management expects 2018 North American operating income below 2017, South America higher, Asia Pacific flat to down, and EMEA higher.
- On July 11, 2018, the board authorized ending wet-milling at the Stockton, California plant and converting it to a shipping distribution station by year-end. The company expects up to $53 million of 2018 pretax restructuring-related charges, including $38 million of accelerated depreciation, up to $8 million of mechanical-stores write-downs, and approximately $7 million of severance and other closing costs. No Stockton-related charges were recorded through June 30.
- Argentina’s peso devaluation and inflation led Ingredion to adopt highly inflationary accounting for its Argentine affiliate effective July 1, 2018. Argentina represented less than 4% of first-half consolidated sales and had a small net peso monetary liability at June 30.
- ASC 606 revenue adoption did not change reported net sales or the nature, amount, timing, or uncertainty of revenue; it reclassified warehousing costs into shipping and handling costs. The company expects the lease standard, planned for adoption January 1, 2019, to materially increase balance-sheet assets and liabilities.
Risks, contingencies, and unusual items
- Commodity costs, freight, foreign exchange, interest rates, and demand remain significant exposures. The company uses derivatives to hedge certain corn, natural-gas, ethanol, currency, and interest-rate risks; it cautions that hedging cannot eliminate all exposure.
- Q2 financing costs rose to $25 million from $20 million, primarily due to foreign-exchange losses. First-half financing costs were $41 million in both years, as lower interest expense was offset by currency losses.
- The company had not finalized its accounting policy for GILTI under the 2017 tax law and had made no related adjustment. It also retained provisional 2017 tax-reform amounts without adjustment in the first half of 2018.
- Brazilian labor claims had approximately $4 million reserved. The company also disclosed ordinary-course environmental and commercial matters; it did not believe currently known proceedings would be material, while noting outcomes are uncertain.
- Management’s forward-looking risks include currency and political conditions, commodity and energy prices, freight, raw-material availability, competition, customer demand, and the ability to achieve Cost Smart savings and complete projects as planned.
Key facts for investors to verify
- Whether North American cost and demand pressures, and elevated tapioca costs, persist and how they affect margins.
- Progress toward the $125 million Cost Smart target, including Stockton closure timing, total charges, and realized savings.
- How operating cash flow develops after excluding the $89 million one-time tax receipts, alongside capital spending and shareholder returns.
- Effects of Argentine highly inflationary accounting, currency movements, and any resulting earnings volatility.
- Final GILTI and other tax-reform accounting, lease-standard adoption impacts, and developments in legal and environmental matters.