Ingredion Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Ingredion produces starches, sweeteners and other ingredients, operating across North America, South America, Asia-Pacific and EMEA. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,543 | $1,536 | +$7; approximately 0.5% |
| Gross profit / gross margin | $323 / 21% | $316 / 21% | +$7; margin flat |
| Operating income | $153 | $161 | -$8; -5% |
| Net income attributable to Ingredion | $75 | $100 | -$25; -25% |
| Diluted EPS | $1.11 | $1.48 | -$0.37 |
| Cash from operating activities | $65 | $18 | +$47 |
| Capital expenditures and mechanical stores purchases | $98 | $80 | +$18 |
Operating cash flow less capital and mechanical-stores spending was negative $33 million. Cash and cash equivalents were $278 million at quarter-end, versus $264 million at December 31, 2019. Current assets were $2,188 million and current liabilities $937 million.
Total debt was $1,948 million, up from $1,848 million at year-end, including $1,871 million of long-term debt and $77 million of short-term borrowings. The company refinanced $200 million of notes due March 2020 with revolving-credit borrowings. It reported approximately $688 million of available revolving-credit capacity and $721 million of unused foreign operating lines, and compliance with its financial covenants. Management stated it intended to refinance $400 million of 4.625% notes due November 2020 on a long-term basis. Weighted-average borrowing cost was 3.9%, versus 4.6% a year earlier.
Changes versus prior period
- Sales were broadly flat: favorable price/product mix was offset by foreign-exchange effects. Cost of sales was also flat, leaving gross margin unchanged.
- Operating expenses rose 3% to $154 million, primarily due to professional-services costs. Restructuring charges increased to $14 million from $4 million.
- Operating income fell 5%; lower financing costs partly offset higher expenses. Net income attributable to Ingredion declined 25%, primarily because of a higher tax provision as well as restructuring and operating expenses.
- The effective tax rate rose to 42.6% from 26.6%. A 24% weakening of the Mexican peso contributed to a $22 million discrete tax expense, compared with a $1 million discrete tax benefit in Q1 2019.
- Operating cash flow improved, mainly from working-capital changes, despite lower net income. Investing cash outflow was $96 million, versus $118 million in Q1 2019; financing provided $62 million, versus $28 million, largely reflecting higher net borrowings.
Segments and management commentary
- North America: Sales increased 1% to $963 million; operating income was unchanged at $125 million. Better price/mix and specialty volumes were offset by lower volumes and higher corn costs related to hedge mark-to-market timing.
- South America: Sales rose 4% to $237 million; operating income increased 44% to $26 million. Favorable price/mix and volume outweighed raw-material and currency impacts.
- Asia-Pacific: Sales declined 7% to $189 million; operating income remained $20 million. COVID-related volume disruption was offset by lower operating costs.
- EMEA: Sales were $154 million, unchanged; operating income rose 13% to $27 million, as favorable price/mix outweighed currency impacts.
Ingredion said its facilities were operating as food-ingredient manufacturing was generally considered essential, and it had not experienced material supply-chain interruptions in Q1. It nevertheless identified COVID-19 as a material uncertainty for future demand and results. Management expected strong Q2 demand for ingredients used in packaged foods sold through retail, but uncertainty in food service; it anticipated pressure on food service, brewery and confectionery demand in South America, lower food-service demand and depressed Mexican brewery volumes in North America, weaker Pakistan volumes, and a possible recovery in Asia-Pacific as restrictions eased. No specific full-year earnings guidance is provided in the filing text.
Restructuring, contingencies and other notable items
- Q1 restructuring charges were $14 million, including Cost Smart initiatives and the Lane Cove, Australia facility closure. The company expected an additional $5–$7 million of closure-related costs in the remainder of 2020 and further Cost Smart SG&A charges during the year. It classified $13 million of assets as held for sale and expected sale proceeds at least equal to carrying value.
- In April 2020, Ingredion agreed terms for a recommended acquisition of PureCircle for approximately GBP 185.3 million. Ingredion would own 75% of the acquisition entity; funding was expected from cash or borrowings. Completion, expected in Q3 2020, remained subject to shareholder, regulatory and other conditions.
- A Brazilian tax-credit ruling remains disputed. Ingredion calculated potential credits of approximately $86 million, while the Brazilian tax authority recognized $22 million; the company recorded $22 million in 2019 and said court proceedings could affect the amount and timing of benefits.
- COVID-19 risks include further demand declines, customer payment delays or credit losses, currency and market disruption, and potential impacts on plant operations. The filing also cites commodity, foreign-exchange and interest-rate exposures, which the company manages partly through derivatives.
- Management said known legal proceedings and inquiries were not expected to be material, while noting that future outcomes cannot be assured. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- Whether COVID-19 demand effects—especially food service, brewing and confectionery—developed as management anticipated, and whether supply, plant operations or customer collections were affected.
- Progress on refinancing the November 2020 notes, debt levels, revolving-credit availability and compliance with leverage and interest-coverage covenants.
- Actual restructuring costs and savings, including the Lane Cove closure and Cost Smart program, compared with the stated expected additional charges.
- Resolution and timing of the Brazilian tax-credit dispute and the sustainability of the unusually high Q1 effective tax rate.
- Whether PureCircle received required approvals and closed on the expected timetable and terms, and the resulting funding and integration implications.
- Underlying operating trends by segment, including the extent to which Q1 sales and profit changes reflected foreign exchange, price/mix, volumes and hedge timing.