Ingredion Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; comparative periods ended September 30, 2017. Amounts are in U.S. dollars. Ingredion produces starches and sweeteners and operates across North America, South America, Asia Pacific, and EMEA.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,450m | $1,485m | $4,415m | $4,395m |
| Gross profit | $334m | $388m | $1,048m | $1,112m |
| Operating income | $155m | $231m | $545m | $634m |
| Net income attributable to Ingredion | $95m | $166m | $349m | $420m |
| Diluted EPS | $1.32 | $2.26 | $4.80 | $5.72 |
| Operating cash flow | Not presented separately | Not presented separately | $579m | $524m in cash flow statement |
- Q3 net sales fell 2%; nine-month sales were broadly flat, up less than 1%. Q3 sales were pressured by unfavorable foreign exchange (5 percentage points), partly offset by pricing/product mix (3 points). Nine-month sales reflected pricing/product mix and volume gains offset by currency headwinds.
- Gross margin declined to 23% from 26% in Q3 and to 24% from 25% for the nine-month period. Operating margin was approximately 10.7% versus 15.6% in Q3, and 12.3% versus 14.4% for nine months.
- Q3 operating income fell 33% and attributable net income fell 43%. Nine-month operating income declined 14% and attributable net income declined 17%. Higher North American production, supply-chain and freight costs, foreign-exchange headwinds, weaker sweetener demand, commodity-margin pressure, and higher Asia Pacific input costs were cited.
- Cash provided by operations was $579m for nine months, including $101m of one-time net tax receipts, primarily related to U.S. tax reform and a U.S.-Canada tax settlement. Capital expenditures and mechanical-stores purchases were $234m.
- At September 30, cash and cash equivalents were $431m and short-term investments were $6m. Total debt was $1.670bn, down from $1.864bn at year-end 2017; long-term debt was $1.559bn and short-term borrowings were $111m. The weighted-average interest rate on indebtedness was approximately 4.8%, versus 4.1% for the comparable 2017 period.
- Current assets were $2.190bn and current liabilities were $875m. The company reported $511m of unused foreign operating lines in addition to available revolving-credit capacity; revolving-facility borrowings were $48m. Management said cash, operating cash flow, debt-market access, and credit capacity should be sufficient for foreseeable needs.
Material changes and segment performance
- Q3 North America operating income decreased to $138m from $177m, mainly due to higher production and supply-chain costs and lower U.S./Canada sweetener demand. Nine-month operating income was $431m versus $515m.
- South America nine-month operating income rose to $68m from $45m, aided by operating efficiencies and the comparison with prior-year optimization costs; Q3 income declined to $22m from $26m, amid currency and volume headwinds.
- Asia Pacific nine-month operating income declined to $75m from $90m, with higher tapioca costs and delayed pass-through cited. EMEA nine-month operating income increased to $86m from $83m.
- Foreign-currency translation reduced Q3 comprehensive income; nine-month currency translation adjustment was a loss of $113m, contributing to accumulated other comprehensive loss of $1.131bn at September 30.
- Ingredion adopted highly inflationary accounting for Argentina effective July 1, 2018 after cumulative three-year inflation exceeded 100%. Argentina’s functional currency changed to the U.S. dollar; Q3 included a $3m remeasurement charge in financing costs. Argentina represented about 3% of consolidated sales.
Outlook, risks, and unusual items
- For 2018, management expected North America operating income to be below the prior year because of production and freight costs, and Asia Pacific operating income to decline because of persistently higher tapioca costs. Growth was expected in South America and EMEA. Planned 2018 capital spending was approximately $330m–$360m.
- The Cost Smart restructuring program included $31m of Q3 charges related to ending wet-milling at the Stockton, California plant, including $28m accelerated depreciation. The company expected up to $22m of additional Stockton-related costs in Q4. Other restructuring charges brought the Q3 total to $34m and nine-month total to $45m.
- Management identified foreign exchange, commodity and energy prices, freight, demand and pricing, raw-material availability, political and economic conditions, and achievement of Cost Smart savings as significant risks. The filing does not quantify expected Cost Smart savings.
- The company expected capital spending and operating needs to be funded by cash, operating cash flow, credit facilities, and debt-market access. A $0.625-per-share quarterly dividend was declared and paid October 25, 2018.
- An accelerated share repurchase covering an initial 4m shares was planned, with final settlement expected in Q1 2019. Separately, the board authorized an additional repurchase program of up to 8m shares in October 2018.
- Brazilian labor claims had an approximately $4m aggregate reserve. Management did not believe known legal matters would be material, while noting future claims or investigations could adversely affect results.
- Accounting changes included retrospective presentation changes for shipping/handling and pension costs; the revenue-standard adoption did not change reported net sales. The company expected the lease-accounting standard, planned for adoption January 1, 2019, to materially increase reported balance-sheet assets and liabilities.
Investor verification points
- Reconcile nine-month 2017 operating cash flow: the cash flow statement reports $524m, while the MD&A liquidity discussion cites $542m.
- Assess the sustainability of earnings and cash flow after separating restructuring charges, the $101m one-time tax receipts, and other tax-related items.
- Track North American cost and demand trends, Asia Pacific tapioca-cost pass-through, and the expected regional 2018 operating-income outcomes.
- Monitor Argentina’s currency and inflation effects, including financing-cost volatility under highly inflationary accounting.
- Confirm final Stockton closure costs, Cost Smart savings realization, the 2019 lease-accounting impact, and the outcome of the accelerated share repurchase.