MGP Ingredients, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 12, 2014. Unless stated otherwise, amounts below are in thousands of dollars. The filing is an annual report, not a standalone fourth-quarter filing.
Business context
MGP produces food-grade and beverage alcohol, distillery co-products, and specialty wheat starches and proteins. Its principal operations are in Atchison, Kansas, and Lawrenceburg/Greendale, Indiana; it also owns 30% of Illinois Corn Processing (ICP). The company sold its bioplastics business in February 2013 and reported three segments for the year: Distillery Products, Ingredient Solutions, and Other.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $323,264 | $334,335 |
| Gross profit / gross margin | $21,239 / 6.6% | $25,023 / 7.5% |
| Operating income (loss) | ($5,199) | ($944) |
| Income (loss) from continuing operations | ($5,807) | $1,624 |
| Net income (loss) | ($4,929) | $1,624 |
| Diluted EPS | ($0.29) | $0.09 |
| Cash flow from operations | $17,300 | ($5,026) |
| Capital expenditures (cash basis) | $6,208 | $9,229 |
Sales declined 3.3%. Distillery Products sales fell 4.6% to $264,098, while Ingredient Solutions sales rose 4.4% to $58,967. Distillery segment pretax income decreased to $11,987 from $14,874; Ingredient Solutions pretax income declined to $4,503 from $5,217. Corporate costs produced a $22,921 pretax loss, versus $21,775 in 2012.
Cash and cash equivalents were $2,857 at year-end, versus zero in 2012. Working capital was $37,736, down from $48,320. Total debt, including the revolving facility, was $23,168, compared with $32,744; revolver borrowings were $18,000, with $23,920 available under the facility after the outstanding letter of credit. The company reported compliance with its credit covenants at year-end. Stockholders’ equity was $81,603, versus $86,827.
Material changes and notable items
- Food-grade alcohol revenue fell 7.0%, principally because industrial alcohol sourced from ICP for resale dropped 82%; average selling price increased 12.6% while volume decreased 17.4%.
- Margins weakened: corn costs averaged 1.9% lower, but flour costs rose 14.7%, natural gas costs rose 3.0%, and segment pricing and mix pressured returns. Prior-year cost of sales included a $2,164 hedging gain; 2013 had no hedging impact.
- 2013 results included $5,465 of proxy/governance-related expenses and $1,525 of severance and related costs. The prior year included a $4,055 pretax gain from selling a 20% ICP interest and an $832 gain on asset sales.
- The bioplastics asset sale generated $2,797 in proceeds and a $878 after-tax discontinued-operations gain. The 2013 income tax benefit from continuing operations was $714; the filing reports a full valuation allowance on net deferred tax assets.
- Operating cash flow improved by $22,326 year over year, aided by changes in receivables, inventory, payables and accrued expenses. The filing notes that increased accruals included proxy-related professional fees and severance.
- Fourth-quarter net sales were $77,294 and net loss was $361. The quarter included $3,404 of proxy/governance-related expense, $1,525 of severance expense, and $528 of tax expense allocated to discontinued operations.
Outlook, risks and contingencies
Management provided no numerical revenue or earnings guidance. For 2014, it plans to improve sourcing, plant efficiency and administrative costs, reduce SG&A compared with 2013 after adjusting for proxy-related costs, and reinvest anticipated savings in marketing and product innovation. Management expects sales growth from Indiana distillery products, including new mash bills, and from ICP. Routine 2014 capital spending was estimated at $4,000–$6,000, with fire-related repairs additional; management expected insurance proceeds to cover much of those costs.
Key risks include volatility in corn, wheat/flour and energy prices and an inability to pass cost increases through to customers; reliance on single suppliers for corn and flour; operating interruptions; and competition. The Indiana plant had a small fire in January 2014 that damaged feed-dryer equipment and temporarily reduced production; the plant returned to pre-fire capacity by the end of February, and insurance coverage remained under review. A shortage of oak barrels may constrain 2014 aged-whiskey and bourbon production.
ICP reported an EBITDA loss exceeding the $500 quarterly threshold in first-quarter 2013. MGP issued a shutdown notice that ICP Holdings rejected; MGP stated it had not withdrawn its election. ICP’s credit facilities had expired without renewal, and MGP planned to source more product from ICP despite having only a 30% ownership interest. The CEO was terminated in December 2013 following a proxy contest; interim co-CEOs were in place, a permanent CEO search was underway, and two additional executives left in January 2014. The filing also identifies environmental compliance obligations, including a phosphorus wastewater study due to Kansas regulators by August 1, 2014.
Important facts for investors to verify
- Current liquidity, borrowing-base availability and covenant headroom under the Wells Fargo facility, including the effects of the February 2014 amendment.
- ICP’s financing, operating performance, supply availability and status of MGP’s shutdown notice and investment recoverability.
- Whether cost reductions, customer pricing and product mix can offset higher flour, grain, energy and other operating costs.
- Insurance recoveries and final repair costs from the Indiana fire, and the effect of barrel availability on aged-product production and inventory.
- Leadership succession and retention, the cash payment timing of accrued proxy and severance costs, and progress on the wastewater permit study.