Ingredion Incorporated — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017 unless stated otherwise. Ingredion produces starches and sweeteners, operating across North America, South America, Asia Pacific, and EMEA. Amounts are in U.S. dollars; financial figures are in millions except per-share amounts.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $1,469 | $1,453 | +1% |
| Gross profit / margin | $354 / 24% | $351 / 24% | +$3 |
| Operating income | $197 | $193 | +2% |
| Income before taxes | $182 | $174 | +5% |
| Net income attributable to Ingredion | $140 | $124 | +13% |
| Diluted EPS | $1.90 | $1.68 | +$0.22 |
| Cash from operating activities | $150 | $131 | +$19 |
| Capital expenditures and mechanical stores purchases | $95 | $72 | +$23 |
Net sales growth reflected 2% volume growth and a 1 percentage-point benefit from currency, partly offset by a 2 percentage-point unfavorable price/product-mix effect. Operating expenses increased 4% to $156 million; expenses were 44% of gross profit versus 43%. Financing costs fell to $16 million from $21 million. The effective tax rate declined to 21.4% from 27.0%, primarily reflecting U.S. tax reform.
Segment results
| Segment | Sales, 2018 / 2017 | Operating income, 2018 / 2017 | Key reported drivers |
|---|---|---|---|
| North America | $874 / $881 | $143 / $158 | Higher freight and production costs, inconsistent winter demand, and commodity pressures |
| South America | $249 / $255 | $26 / $15 | Higher volumes and operational efficiencies; sales also affected by currency and lower raw-material pass-through pricing |
| Asia Pacific | $194 / $179 | $23 / $30 | Higher tapioca costs offset volume growth and favorable currency |
| EMEA | $152 / $138 | $31 / $28 | Volume growth and favorable currency |
Cash, debt, and liquidity
- Cash and cash equivalents were $401 million at March 31, 2018, down from $595 million at year-end; short-term investments were $6 million. Cash and short-term investments totaled approximately $407 million, of which approximately $285 million was held outside the United States.
- Operating cash flow was $150 million. Investing activities used $86 million and financing activities used $261 million. The decrease in cash was mainly associated with financing, including $230 million of Term Loan repayments and $46 million of dividends paid.
- Total debt was $1.652 billion, down from $1.864 billion at December 31, 2017. This included $1.512 billion of long-term debt and $140 million of short-term borrowings. The weighted-average interest rate was approximately 4.5%.
- No borrowings were outstanding on the revolving credit facility; the company reported approximately $531 million of unused operating lines of credit in foreign countries. Management stated that cash, operating cash flow, debt-market access, and borrowing capacity should provide sufficient liquidity for the foreseeable future.
- 2018 capital expenditures and mechanical stores purchases were expected to total approximately $330–$360 million. The Board declared a quarterly dividend of $0.60 per share, paid April 25, 2018.
Material changes, outlook, and risks
- Management attributed earnings growth mainly to stronger South America and EMEA results, partly offset by weaker North America and Asia Pacific performance. Excluding restructuring, net income growth was 2%, rather than the reported 13% increase.
- Management expected full-year 2018 net income to grow versus 2017. It expected North America operating income to decline; South America to improve; Asia Pacific to be flat to down; and EMEA to grow. Higher freight and production costs in North America and prolonged higher tapioca costs in Asia Pacific were identified as pressures.
- Q1 2018 included $3 million of pre-tax restructuring charges: $2 million for the North America Finance Transformation initiative and $1 million related to Brazil’s leaf-extraction process. The company expected another $1–$2 million of North America initiative costs during the remainder of 2018. Q1 2017 included $10 million of restructuring/impairment charges, as presented in the income statement, along with separate acquisition-related and acquired-inventory charges.
- The company adopted ASC 606 in 2018 and retrospectively reclassified warehousing costs into shipping and handling costs, which remain presented as a reduction of sales. This changed the presentation of 2017 amounts but not net sales. Pension-cost presentation was also retrospectively adjusted; these presentation changes did not alter net income.
- Tax reform accounting remained subject to refinement: the company had recorded a provisional $23 million net tax expense in Q4 2017 and made no adjustment in Q1 2018. It was still evaluating its accounting policy for GILTI taxes.
- Key exposures include commodity prices (particularly corn and natural gas), freight and energy costs, foreign exchange, interest rates, raw-material availability, demand and pricing, and regional economic and political conditions. The company uses derivatives to hedge certain exposures; it reported hedges for forecast corn, natural gas, and ethanol transactions.
- Ingredion had approximately $5 million reserved for Brazilian labor claims. It also faced ordinary-course commercial and environmental matters; management did not believe currently known proceedings would be material, while cautioning that adverse outcomes cannot be ruled out. The company disclosed no material change in its market-risk information from year-end.
Important facts for investors to verify
- Whether the expected full-year earnings growth is achieved, given management’s segment outlook and cost pressures.
- How freight, production, tapioca, commodity, and raw-material costs affect segment margins and pricing.
- Whether operating cash flow and liquidity remain adequate alongside planned capital spending, dividends, and debt obligations.
- Progress on the provisional tax-reform accounting and the company’s eventual GILTI accounting policy.
- Developments in Brazilian labor claims and other environmental or commercial proceedings.
- Comparability of reported periods: 2017 presentation was retrospectively adjusted for revenue and pension accounting changes; the filing states that revenue-standard adoption did not change net sales.