Ingredion Incorporated — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Figures are in U.S. dollars unless noted. Interim results are not necessarily indicative of full-year results.
Business context and financial performance
Ingredion produces starches, sweeteners, and other ingredient solutions through four geographic segments: North America, South America, Asia-Pacific, and EMEA. It acquired stevia producer PureCircle on July 1, 2020; PureCircle is consolidated in Asia-Pacific.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1.502 billion | $1.574 billion | $4.394 billion | $4.660 billion |
| Gross profit / margin | $326 million / 22% | $344 million / 22% | $920 million / 21% | $989 million / 21% |
| Operating income | $153 million | $165 million | $419 million | $494 million |
| Net income attributable to Ingredion | $92 million | $99 million | $233 million | $304 million |
| Diluted EPS | $1.36 | $1.47 | $3.45 | $4.51 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $562 million | $490 million |
Q3 sales fell 5% and Ingredion-attributable net income fell 7% year over year. For the first nine months, sales declined 6% and attributable net income declined 23%. Gross margin was unchanged in both comparison periods. The nine-month effective tax rate increased to 34.4% from 27.8%; Q3 rate was 30.1% versus 27.1%.
Cash, debt, and liquidity
- Cash and cash equivalents were $553 million at September 30, 2020, up from $264 million at December 31, 2019. Current assets were $2.430 billion and current liabilities $955 million.
- Total debt was $2.177 billion, compared with $1.848 billion at year-end 2019; long-term debt was $2.115 billion and short-term borrowings $62 million. The filing reports cash, but does not provide a net-debt measure.
- Operating cash flow of $562 million was offset by $460 million of investing outflows, including $250 million of capital expenditures and mechanical stores purchases and $208 million paid for PureCircle, net of cash acquired. Financing provided $202 million, including proceeds from $1.0 billion of senior notes, partly offset by debt repayments and dividends.
- Ingredion reported approximately $1.0 billion available under its revolving credit facility and $723 million of unused foreign operating lines. It was in compliance with its leverage and interest-coverage covenants. Management expected cash, operating cash generation, available borrowing capacity, and debt-market access to meet needs for at least 12 months.
Material changes and segment results
- Management attributed lower earnings mainly to COVID-19-related volume reductions, particularly in the Americas; foreign-exchange effects; the Verdient investment impairment; and PureCircle’s operating losses. Lower restructuring charges versus the prior-year quarter partly offset these factors.
- North America: Q3 sales declined 6% and operating income declined 9%; nine-month sales fell 6% and operating income 12%. Lower away-from-home demand, including brewery shutdowns in Mexico during Q2, weighed on results.
- South America: Q3 sales declined 9%, primarily from adverse foreign exchange, while operating income rose 7% on favorable price mix. Nine-month sales fell 8%, while operating income rose 11%.
- Asia-Pacific: Q3 sales rose 1%, but operating income fell 18%, including $5 million of PureCircle operating losses. Nine-month sales fell 5% and operating income 8%.
- EMEA: Q3 sales rose 2% and operating income 4%; nine-month sales fell 2% and operating income rose 3%.
Outlook, unusual items, and risks
- Management anticipated continued COVID-19 effects on Q4 volumes. Away-from-home consumption was expected to remain variable and suppress related ingredient demand, while modestly higher in-home food consumption was expected to support some volumes. The filing provides no specific full-year earnings or revenue guidance.
- Q3 and nine-month restructuring and impairment charges totaled $16 million and $41 million, respectively. These included a $10 million impairment of the Verdient equity-method investment, triggered by the agreed purchase price for the remaining stake. Ingredion acquired the remaining 80% of Verdient on November 3, 2020, for CAD $33 million.
- PureCircle contributed $5 million of operating losses in Q3 and incurred $5 million of acquisition and integration costs in the quarter. Its preliminary purchase accounting included $48 million of goodwill; allocation remained subject to change.
- A storm shut down the Cedar Rapids facility for 10 days and resulted in $2 million of Q3 charges. Management expected $1 million to $2 million of additional Lane Cove restructuring costs during the remainder of 2020.
- Key exposures include pandemic-driven demand shifts, foreign exchange, corn and natural-gas prices, raw-material availability, competitive and customer pressures, acquisition integration, manufacturing disruptions, and legal and regulatory matters. An EPA notice concerning alleged environmental violations at the Indianapolis facility remained under DOJ discussions; the company disputed the allegations and could not provide a specific sanctions estimate. No litigation had been initiated.
Important facts for investors to verify
- Whether away-from-home demand and North American volumes recover as anticipated, and the resulting effect on margins and earnings.
- PureCircle’s post-acquisition operating performance, integration costs, final purchase-price allocation, and contribution to Asia-Pacific results.
- Verdient’s integration and performance following the November 2020 purchase, including the implications of the $10 million impairment.
- Debt refinancing and covenant capacity, especially the term loan due April 2021, and the sustainability of cash flow after capital spending and dividends.
- Resolution and potential financial exposure of the Indianapolis environmental matter, along with remaining restructuring and storm-related costs.