Ingredion Incorporated — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Unless stated otherwise, financial figures are in U.S. dollars.
Business context
Ingredion produces starches, sweeteners, specialty ingredients, animal-feed products and other ingredients from corn and other plant-based materials. It operates across North America, South America, Asia-Pacific and EMEA. Specialty ingredients represented approximately 30% of 2019 net sales, up from 29% in 2018.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $6.209 billion | $6.289 billion |
| Gross profit / gross margin | $1.312 billion / 21% | $1.368 billion / 22% |
| Operating income | $664 million | $703 million |
| Net income attributable to Ingredion | $413 million | $443 million |
| Diluted EPS | $6.13 | $6.17 |
| Cash from operating activities | $680 million | $703 million |
| Capital expenditures and mechanical-stores purchases | $328 million | $350 million |
| Total debt | $1.848 billion | $2.100 billion |
Fourth-quarter 2019 net sales were $1.549 billion, versus $1.537 billion in fourth-quarter 2018; net income attributable to Ingredion was $109 million versus $94 million, and diluted EPS was $1.61 versus $1.36.
At year-end, cash and cash equivalents were $264 million, short-term investments were $4 million, working capital was $1.193 billion, and total equity was $2.741 billion. The company reported $990 million available under its $1 billion revolving credit facility and approximately $585 million of unused foreign operating lines. It was in compliance with credit-facility financial covenants. The weighted-average interest rate on total indebtedness was approximately 4.3%.
Net debt to adjusted EBITDA, a non-GAAP measure, was 1.7x versus 1.8x in 2018; net debt to capitalization was 34.7% versus 40.1%. Adjusted ROIC was 12.1%, compared with 13.5% in 2018.
Material changes versus prior year
- Sales fell 1%, while operating income declined 6% and net income attributable to Ingredion fell 7%. Management cited commodity-margin pressure, higher production and supply-chain costs, and unfavorable currency translation.
- Lower sales reflected currency effects and reduced volume following the Stockton, California wet-milling cessation; favorable price and product mix partly offset these factors. Gross margin declined by one percentage point, primarily due to higher raw-material costs.
- Operating income declined in every reported segment: North America to $522 million from $545 million; South America to $96 million from $99 million; Asia-Pacific to $87 million from $104 million; and EMEA to $99 million from $116 million.
- Operating cash flow decreased $23 million, primarily because of lower net earnings. Total debt declined by $252 million year over year.
Outlook, commentary, risks and unusual items
- Cost Smart: The company set a $125 million savings target by year-end 2021, including $75 million in cost-of-sales savings and $50 million in SG&A savings. It recorded $57 million of pretax restructuring charges in 2019 and expected additional SG&A-program charges in 2020.
- Facility closure: The Lane Cove, Australia closure generated $15 million of restructuring charges in 2019; an additional $10 million to $12 million of expense was expected in 2020, before possible asset-sale proceeds.
- Growth investment: Ingredion described plans for $185 million of investment in plant-based protein products through 2020. Western Polymer was acquired in 2019 for $42 million, expanding potato-starch capabilities.
- Brazil tax matter: A favorable court decision could support approximately $86 million of credits, but a Brazilian tax ruling recognized only $22 million and further court proceedings could affect the outcome. The company recorded $22 million of pretax income in 2019; additional credits and timing remain uncertain.
- Debt refinancing: $600 million of long-term debt was due in 2020. The company stated it had the ability and intent to refinance the 2020 senior notes on a long-term basis before maturity.
- Key risks: Corn and other input and energy costs, ability to pass costs through, competition and demand shifts, currency movements and economic or political conditions in South America, climate and weather, plant reliability, labor relations, regulation, and cybersecurity. The filing also identified the coronavirus outbreak emerging in early 2020 as a potential risk.
- Cyber incident: Suspicious activity affected certain servers from October to December 2019. Management reported no material financial impact or evidence of improper access to customer, supplier or employee data; remediation was completed in December.
- Other matters: A $107,000 Thai administrative fine was paid in 2019. The company reported ongoing ordinary-course claims and environmental matters, including discussions about possible remediation studies at its Chacabuco, Argentina plant, which management did not expect to be material.
- The filing provides no clear quantified full-year 2020 revenue or earnings guidance. Management said available cash, expected operating cash flow, debt-market access and credit capacity should fund foreseeable requirements.
For comparability, the company retrospectively reclassified shipping and handling costs from net sales to cost of sales. This increased reported sales and cost of sales without changing gross profit, operating income, net income or EPS. The 2019 shipping and handling cost was $466 million.
Important facts for investors to verify
- Whether price and product-mix improvements can offset input-cost inflation and weaker volumes, and whether margins recover.
- Progress toward the $125 million Cost Smart target, remaining restructuring costs, and realization of expected savings.
- Refinancing and repayment plans for 2020 maturities, and continued compliance with debt covenants.
- The eventual amount and timing of Brazilian tax credits, given the difference between the company’s estimated potential credits and the amount recorded.
- Potential operating and financial effects of currency, geopolitical, climate, supply-chain and pandemic-related developments.
- Assumptions underlying pension obligations and valuation of goodwill and other long-lived assets; the auditor identified pension and postretirement benefit obligations as a critical audit matter.
KPMG issued an unqualified opinion on the consolidated financial statements and concluded that internal control over financial reporting was effective as of December 31, 2019.