Ingredion Incorporated — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; unaudited quarterly data is also provided. Ingredion makes starches, sweeteners, specialty ingredients and related products from corn and other agricultural materials. It reports North America, South America, Asia Pacific and EMEA. North America generated 61% of 2017 sales. Specialty ingredients were 28% of sales, versus 26% in 2016.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $5.832 billion | $5.704 billion |
| Gross profit / margin | $1.473 billion / approximately 25% | $1.402 billion / approximately 25% |
| Operating income | $842 million | $808 million |
| Net income attributable to Ingredion | $519 million | $485 million |
| Diluted earnings per share | $7.06 | $6.55 |
| Cash provided by operating activities | $769 million | $771 million |
| Capital expenditures and mechanical stores purchases | $314 million | $284 million |
| Total debt | $1.864 billion | $1.956 billion |
| Cash and cash equivalents | $595 million | $512 million |
| Working capital | $1.458 billion | $1.274 billion |
Annual sales rose 2%, reflecting 3% volume growth and 1% favorable currency translation, partly offset by a 2% decline in price/product mix. Reported operating income rose 4%, net income attributable to Ingredion rose 7%, and diluted EPS rose 8%. The filing says that excluding specified unusual items, net income and diluted EPS each grew 7% and 8%, respectively. Annual gross margin was broadly unchanged. Q4 2017 net sales were $1.437 billion and net income attributable to Ingredion was $99 million, compared with $1.399 billion and $94 million in Q4 2016; diluted EPS was $1.35 versus $1.26.
Material changes and segment performance
- North America: Sales increased 2% to $3.529 billion; operating income increased 8% to $661 million, supported by favorable raw-material costs, volume growth and efficiencies.
- South America: Sales were nearly flat at $1.007 billion; operating income fell 10% to $80 million. The filing cites difficult macroeconomic conditions, unfavorable price/mix, higher costs in Argentina and a second-quarter manufacturing interruption.
- Asia Pacific: Sales increased 4% to $740 million, while operating income was approximately flat at $112 million. Higher volume and favorable currency were partly offset by lower price/mix.
- EMEA: Sales increased 3% to $556 million and operating income increased 7% to $113 million, reflecting favorable price/mix and volume growth, partly offset by higher operating costs.
Ingredion acquired Sun Flour in Thailand for $18 million in March 2017. The acquisition was not material to 2017 results. The company repurchased approximately one million shares for $123 million in the first quarter and declared dividends of $2.20 per share for the year, up from $1.90 in 2016.
Liquidity, debt and cash flow
Operating cash flow was nearly unchanged year over year. Working-capital outflows included the $63 million IRS payment settling the U.S.-Canada double-taxation matter. Investing cash use was $326 million, including $314 million of capital expenditures and mechanical stores purchases. Financing cash use was $375 million. Net debt to adjusted EBITDA was 1.2x, down from 1.4x; net debt to capitalization was 28.6%, down from 34.0%. The company reported no borrowings under its $1 billion revolving credit agreement at year-end and approximately $488 million of unused foreign operating lines. It met its debt covenant requirements.
Debt included $395 million outstanding under a variable-rate term loan due April 2019 and $120 million of short-term borrowings. The company paid another $185 million toward the term loan in January 2018. Management expected cash, operating cash flow, debt-market access and available credit to cover anticipated needs. Planned 2018 capital expenditures and mechanical stores purchases were approximately $330 million to $360 million.
Outlook, commentary and risks
Management expected operating income and net income to grow in 2018, without providing quantified growth guidance. It anticipated improvement in South America from volume recovery and favorable price/mix; growth in EMEA; and North America improvement from better mix and margins in the second half, partly offset by higher costs in Mexico. Asia Pacific growth was expected in the second half despite anticipated high tapioca costs. Management also planned continued cost and network optimization.
- Unusual items: 2017 results included $38 million of pre-tax restructuring and impairment charges and a reported $47 million of net after-tax one-time costs. Items included Argentina restructuring, Brazil leaf-extraction asset and inventory write-downs, a North American finance initiative, acquired-inventory fair-value costs, and a $9 million insurance settlement. The 2017 tax provision included a provisional $23 million net expense related to the Tax Cuts and Jobs Act; the company said estimates could change in 2018. Its treatment of GILTI remained under evaluation.
- Operating and market risks: Major exposures include corn and other raw-material and energy prices, ability to pass cost changes through to customers, competition and changing consumer preferences, foreign exchange, political and economic conditions in South America, and production reliability. The Argentina labor strike interrupted manufacturing in Q2 and ended June 1, 2017.
- Other risks and contingencies: Environmental compliance, product safety, cybersecurity, pension assumptions, tax audits and impairment of goodwill or other assets may affect results. The company had approximately $803 million of goodwill and $493 million of other intangible assets. It reported $5 million reserved for Brazilian labor claims; management did not expect currently known legal matters to be material, while noting outcomes are uncertain.
- Accounting and control matters: The company expected adoption of the new lease standard to materially increase balance-sheet assets and liabilities, but had not quantified the effect. Management and the auditor reported effective internal control over financial reporting; Sun Flour was excluded from the 2017 control assessment.
Important facts for investors to verify
- Whether 2018 earnings growth materialized, especially in South America and Asia Pacific, and whether expected North American margin improvement offset Mexico costs.
- Final adjustments to the provisional TCJA accounting, the company’s GILTI policy and resulting tax rate and cash-tax effects.
- Execution and cost of the planned $330–$360 million 2018 capital program, and repayment and refinancing of the term loan due in 2019.
- Whether restructuring, Argentina labor conditions, raw-material prices and pricing/mix affect segment margins and cash generation.
- Potential effects of lease-standard adoption and any impairment or tax-contingency developments.