Ingredion Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Ingredion produces starches and sweeteners for food, beverage, brewing, animal nutrition and other markets, operating through North America, South America, Asia-Pacific and EMEA. Figures below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,420 | $1,469 | Down 3% |
| Gross profit / margin | $316 / 22% | $354 / 24% | Profit down 11%; margin down 2 percentage points |
| Operating income | $161 | $197 | Down 18% |
| Net income attributable to Ingredion | $100 | $140 | Down 29% |
| Diluted EPS | $1.48 | $1.90 | Down 22% |
| Operating cash flow | $18 | $150 | Down $132 |
| Capital expenditures and mechanical stores | $80 | $95 | Down $15 |
Management attributed weaker earnings primarily to higher raw-material and production costs and continued foreign-exchange effects. Net sales fell despite a 5% favorable price/product-mix contribution, mainly reflecting pricing pass-throughs; unfavorable currency translation reduced sales 6% and core volumes declined 2%. Gross margin pressure reflected currency translation and higher North American input and production costs. Financing costs rose to $22 million from $16 million, primarily due to higher net debt and interest rates. The effective tax rate increased to 26.6% from 21.4%.
Segments and material changes
- North America: Sales $860 million, down 2%; operating income $125 million, down 13%. Higher inventory, production and net corn costs, plus modest extreme-weather effects, weighed on results.
- South America: Sales $218 million, down 12%; operating income $18 million, down 31%. Weaker Argentine peso and Brazilian real and lower volumes were partially offset by price/product mix.
- Asia-Pacific: Sales $194 million, unchanged; operating income $20 million, down 13%. Higher corn costs and currency effects offset specialty volume growth and improved mix.
- EMEA: Sales $148 million, down 3%; operating income $24 million, down 23%. Currency translation and higher raw-material costs were partially offset by volume and mix improvement.
On March 1, 2019, Ingredion acquired Western Polymer LLC, a U.S. potato-starch producer, for $41 million net of $4 million cash acquired. Preliminary purchase accounting recorded $22 million of goodwill and $19 million of net tangible assets; the allocation remained in process. The acquired results are included in North America from the acquisition date, recorded on a one-month lag.
Cash, debt and liquidity
Cash and cash equivalents were $255 million at March 31, 2019, down from $327 million at year-end; cash plus short-term investments was $259 million. Current assets were $2.17 billion and current liabilities $901 million. Total debt was $2.11 billion, versus $2.10 billion at December 31, 2018, comprising $1.957 billion long-term debt and $153 million short-term borrowings. Operating cash flow was substantially lower, driven by lower earnings and working-capital outflows, including receivables/prepaids, inventory and payables. Investing cash outflow was $118 million, including $80 million of capital spending and $41 million for the acquisition; financing provided $28 million, including $225 million borrowings, $217 million debt repayments, and dividends paid of $42 million.
Management said cash balances, operating cash flow, debt-market access and credit availability should fund anticipated needs for the foreseeable future. It reported approximately $526 million of unused foreign operating lines of credit in addition to availability under its revolving facility. Approximately $231 million of $259 million in cash and short-term investments was held outside the U.S. On April 12, 2019, after quarter-end, the company amended and restated its term loan as a facility of up to $500 million maturing in April 2021; the existing $165 million borrowing continued under the amended facility.
Outlook, risks and unusual items
- For 2019, management expected North American operating income to be flat to down year over year, assuming then-current corn and coproduct market values. South America was expected to be flat; Asia-Pacific and EMEA were expected to deliver flat to modest operating-income growth.
- 2019 capital expenditures and mechanical-stores purchases were expected to total approximately $330–$360 million.
- The Cost Smart restructuring program generated $4 million of Q1 pretax charges, versus $3 million in Q1 2018. The company expected less than $1 million of additional Finance Transformation costs and about $1 million to complete the Stockton project in the remainder of 2019.
- Brazil’s Federal Court of Appeals issued a favorable decision on recovery of certain historical indirect taxes. The credit amount and interest were still being calculated; pending court decisions could affect the calculation and timing, with completion anticipated later in 2019.
- Key exposures include corn, natural gas and coproduct prices; foreign exchange, including Argentina’s highly inflationary accounting; interest rates; weather and freight; market demand and customer credit; and the ability to realize Cost Smart savings and integrate acquisitions. Ordinary-course legal, environmental, labor and commercial matters were disclosed; the company did not expect known proceedings to be material, while noting outcomes are uncertain.
- Adoption of the new lease standard in January 2019 recognized $170 million of operating lease liabilities and $161 million of net lease assets at transition, with no material income-statement or cash-flow impact.
Investor verification priorities
- Determine whether cost inflation, foreign-exchange effects and weaker volumes persist, especially in North America and South America, and whether segment outlook assumptions hold.
- Track working-capital movements and cash generation against the $330–$360 million annual capital-spending plan, dividends and debt requirements.
- Review debt maturities, revolving-facility usage, interest costs and the terms and capacity of the amended term loan.
- Follow Western Polymer purchase-accounting completion, integration costs and expected operating contribution.
- Monitor the Brazilian tax-credit calculation and pending proceedings, and assess whether the expected benefit is recognized and realized.
- Check progress and remaining costs under Cost Smart, and whether planned savings offset restructuring and other operating pressures.