Ingredion Incorporated — 2018 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2018; the filing also presents unaudited fourth-quarter results. Ingredion produces starches, sweeteners, specialty ingredients, animal-feed products and edible corn oil from corn and other plant-based materials. It reports four geographic segments: North America, South America, Asia Pacific and EMEA. Specialty ingredients represented approximately 29% of 2018 net sales.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $5.841 billion | $5.832 billion |
| Gross profit / gross margin | $1.368 billion / 23% | $1.472 billion / 25% |
| Operating income | $703 million | $836 million |
| Net income attributable to Ingredion | $443 million | $519 million |
| Diluted EPS | $6.17 | $7.06 |
| Cash from operating activities | $703 million | $769 million |
| Capital expenditures and mechanical stores | $350 million | $314 million |
| Cash and cash equivalents at year-end | $327 million | $595 million |
| Total debt at year-end | $2.100 billion | $1.864 billion |
| Working capital | $1.192 billion | $1.458 billion |
For Q4 2018, net sales were $1.426 billion, gross profit was $320 million, net income attributable to Ingredion was $94 million, and diluted EPS was $1.36. In Q4 2017, the corresponding figures were $1.437 billion, $360 million, $99 million and $1.35.
Changes versus the prior comparable period
- Annual sales were essentially flat: 1% volume growth and 2% favorable price/product mix were offset by 3% unfavorable currency translation.
- Operating income fell 16% and attributable net income fell 15%. Management cited lower North American sweetener demand, commodity-margin pressure, higher production and supply-chain costs, higher Asia Pacific raw-material costs and unfavorable currency effects.
- North America operating income declined 17% to $545 million; South America rose 22% to $99 million; Asia Pacific declined 10% to $104 million; and EMEA increased 2% to $116 million.
- Cash from operations declined $66 million. Cash used for repurchases rose to $657 million, including a fourth-quarter accelerated share repurchase; year-end cash fell while debt increased.
Outlook, commentary, risks and unusual items
- Management expected 2019 operating income to be flat to slightly favorable versus 2018, with the first half expected to be weaker because of higher anticipated corn costs and unfavorable currency translation. It forecast improvement in South America and modest growth in Asia Pacific and EMEA, weighted toward the second half.
- The Cost Smart program targets $125 million in savings by year-end 2021: $75 million in cost of sales, including freight, and $50 million in SG&A. 2018 included $64 million of pretax restructuring charges, including costs related to ending wet-milling at Stockton, California. Up to $3 million of additional Stockton-related costs were expected in 2019.
- Ingredion reported a $51 million after-tax restructuring charge in 2018 and $54 million in total one-time net after-tax costs. The Stockton facility ceased manufacturing in Q4 2018. The accelerated share repurchase initially cost $455 million; the February 2019 settlement returned $63 million in cash, making the final cost $392 million for 4.0 million shares.
- Argentina adopted highly inflationary accounting from July 1, 2018, after three-year cumulative inflation exceeded 100%. Currency depreciation and inflation can affect reported results and financing costs.
- Principal exposures include corn, tapioca, energy and freight prices; the ability to pass cost increases through to customers; foreign exchange and political/economic conditions; consumer shifts away from certain sweeteners; competition; plant reliability; and environmental, regulatory, cyber and labor risks. The company uses derivatives to hedge selected commodity, currency and interest-rate exposures, but hedging can itself result in losses.
- The company expected adequate liquidity from cash, operating cash flow and credit facilities. At year-end, $418 million was outstanding under its $1 billion revolving facility, with $582 million available; a $165 million term loan was due April 25, 2019, and management said it intended and was able to refinance it long term. The company reported compliance with credit covenants.
- Management expected adoption of the new lease-accounting standard in 2019 to have a material balance-sheet impact; the amount was not yet finalized. Known legal and regulatory matters were not expected by management to be material, though outcomes are uncertain. Argentina remediation discussions were ongoing, with management not expecting the ultimate cost to be material.
Most important facts for investors to verify
- Whether Cost Smart delivers its stated savings and offsets ongoing margin pressure, particularly in North America.
- The 2019 operating-income outlook against corn and other input costs, pass-through timing, currency movements and segment trends.
- Debt refinancing and leverage: the term-loan maturity, revolving-credit usage, and net-debt metrics. The filing gives net debt to adjusted EBITDA as 1.8 in one table but 1.7 in the accompanying commentary; verify the intended figure.
- The cash-flow and capital-allocation implications of the $657 million of 2018 repurchases, the final ASR settlement, and ongoing dividends and capital spending.
- The eventual balance-sheet effect of lease-standard adoption and developments in Argentina’s inflation, currency and environmental matters.