Ingredion Incorporated — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; dollar amounts are in millions except per-share data.
Business context
Ingredion produces starches and sweeteners and other ingredient solutions, operating through four geographic segments: North America, South America, Asia-Pacific, and EMEA. It reported 46 manufacturing plants. Its strategic growth platforms include starch-based texturizers, clean and simple ingredients, plant-based proteins, sugar reduction and specialty sweeteners, and value-added food systems.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,434 | $1,496 | $2,854 | $2,965 |
| Gross profit | $329 | $360 | $645 | $714 |
| Operating income | $168 | $193 | $329 | $390 |
| Net income attributable to Ingredion | $105 | $114 | $205 | $254 |
| Diluted EPS | $1.56 | $1.57 | $3.04 | $3.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $253 | $352 |
- Q2 net sales declined 4%; management attributed this primarily to unfavorable foreign-exchange effects and a 2% volume decline, partly offset by 3% favorable price/product mix.
- Gross margin was 23% in Q2 and for the first half, compared with 24% in both prior-year periods. Management cited foreign exchange and higher raw-material costs, partly offset by improved price/mix.
- Q2 operating income declined 13%, and first-half operating income declined 16%. First-half net income attributable to Ingredion fell 19%.
- Q2 net financing costs were $16, down from $25, mainly reflecting foreign-exchange gains versus losses a year earlier; higher net interest expense partly offset the improvement. First-half financing costs were $38 versus $41.
- First-half operating cash flow decreased by $99, primarily from lower earnings and working-capital movements. Capital expenditures and mechanical-stores purchases were $156.
Segments and material changes
- North America: Q2 sales were $885, down 3%; operating income was $139, down 7%. Planned Stockton HFCS and industrial-starch volume reductions, higher corn costs, lower co-product values, and maintenance weighed on results.
- South America: Q2 sales were $215, down 7%; operating income was $16, down 20%. Currency weakness was partly offset by pricing actions.
- Asia-Pacific: Q2 sales were $195, down 3%; operating income was $23, down 15%, reflecting currency effects and higher corn costs, partly offset by price/mix.
- EMEA: Q2 sales were $139, down 5%; operating income was $23, down 21%, reflecting foreign exchange and higher raw-material costs, partly offset by improved price/mix.
- All four segments reported lower first-half operating income year over year. Across the company, foreign exchange, raw-material and production costs, and planned volume reductions were key headwinds; Cost Smart expense reductions and pricing actions provided partial offsets.
Liquidity, debt, and capital allocation
- At June 30, cash and cash equivalents were $297, short-term investments were $4, and total debt was $2,053, versus $2,100 at year-end 2018. Current assets were $2,215 and current liabilities $894.
- Ingredion had $1,946 of long-term debt and $107 of short-term borrowings. It drew the full $500 available under a new term loan maturing April 2021, using proceeds to repay its former term loan and reduce revolving-credit borrowings. Revolver borrowings at quarter-end were $94.
- Management reported approximately $900 of additional revolving-credit availability and $565 of unused foreign operating lines; the company was in compliance with its financial covenants. It stated available cash, operating cash flow, debt-market access, and credit capacity should fund anticipated needs for the foreseeable future.
- Management expected 2019 capital expenditures and mechanical-stores purchases of approximately $330–$360. The quarterly dividend was $0.625 per share. Cash dividends paid in the first half were $87, including payments to non-controlling interests.
- Cash and short-term investments totaled $301; approximately $281 was held outside the U.S. The company said it did not anticipate needing to repatriate funds for ordinary-course U.S. liquidity requirements.
Outlook, risks, and unusual items
- Management expected full-year operating income to be down year over year in North America, Asia-Pacific, and EMEA, and flat in South America, assuming then-current market conditions. Cited factors included U.S. weather and late planting, crop inventory imbalances related to U.S.-China trade tensions, foreign exchange, input costs, slower expected regional demand, macroeconomic challenges, and Brexit uncertainty.
- Cost Smart restructuring charges were $9 in Q2 and $13 in the first half. First-half acquisition and integration costs were $2. Management expected less than $1 of additional Finance Transformation costs in the rest of 2019 and no further costs to complete the Stockton-related project.
- Ingredion acquired Western Polymer LLC on March 1, 2019, for $42 net of cash acquired. The preliminary allocation included $13 of goodwill and intangible assets and $29 of net tangible assets; valuations remained subject to finalization. The acquired potato-starch business was included in North America.
- A favorable Brazilian federal court decision may entitle the company to tax credits and related interest for prior years. The amount and timing were still being calculated and could change with pending court decisions; the filing provides no clear value for the potential benefit.
- The company hedges corn, natural gas, foreign-currency, and interest-rate exposures. Its disclosed risks include commodity and co-product price volatility, currency movements, weather and raw-material availability, trade disputes, regional economic conditions, and energy, freight, and regulatory changes.
- A Thai subsidiary paid approximately $107,000 in May 2019 fines for an administrative waste-transporter registration error. The company said no environmental harm was asserted and did not expect recurrence. It stated known legal proceedings and inquiries were not expected to be material, while noting outcomes cannot be assured.
- Adoption of the new lease standard in January 2019 recognized $170 of operating lease liabilities and $161 of operating lease assets initially; the company said it did not materially affect income or cash flows.
Investor verification points
- Review whether operating performance and margins recover from the first-half declines, particularly as FX, corn costs, co-product values, and regional demand evolve.
- Track realization of Cost Smart savings and whether restructuring and integration costs remain within management’s expectations.
- Confirm the final Western Polymer purchase-price allocation and integration performance.
- Monitor the amount, timing, and accounting impact of the Brazilian tax credits and related interest once calculations and court matters are resolved.
- Assess debt refinancing and liquidity, including the 2020 note maturities, covenant headroom, and substantial cash held outside the U.S.
- Compare actual 2019 capital spending and segment results with management’s stated outlook; the filing does not provide a full-year EPS or revenue target.